| Other expenses you could face
in obtaining a mortgage loan are points and origination
fee, which are charged by the mortgage lender.
These fees are usually paid at closing or settlement,
thereby adding to your list of closing costs.
A lender can charge one, two or more points.
There are two kinds of points:
• Discount points: These change with the
interest rate since points are actually prepaid
interest on the mortgage loan. Each point is one
hundredth of the loan amount. For instance, on
a $100,000 mortgage, one point is $1,000. Generally,
the more points you pay, the lower the interest
rate on the loan and, vice versa, fewer points
generally mean higher interest rates. If a lender
charges no points, you may end up paying a higher
rate or larger fees, or some combination of the
two
• Origination fee: This is charged by the
lender either to cover costs, or to boost profits.
A loan origination fee covers the lender’s
cost of preparing all the documents associated
with your mortgage.
Keep in mind you can deduct the cost of points
on your federal income tax (but not other fees
involved in closing costs). Sometimes you negotiate
to get the seller to pay the points, rather than
lower the price of the house. In that case, you
can't deduct the points, either.
Which is better, points or no points?
When you go shopping for a loan, always ask for
a quote with and without points. Points as prepaid
interest help reduce the interest rate. For example,
a lender might offer you a 30-year fixed mortgage
of $100,000 at 7.5 percent interest with no points.
The monthly mortgage principal and interest payment
would be $699. But if you pay two points at closing
(that’s $2,000) you can bring the interest
rate down to 7 percent, with a monthly payment
of $665. The savings difference would be $34 per
month.
The best option depends on your individual needs,
but, if you need to reduce closing costs, choose
the zero point option on your loan program.
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