What Are Points

What is a point?

Points are the money paid to the lender that allow the lender to make loans at a regulated, lower-than-market interest rate and still obtain the desired rate of return. A point is equal to 1% of the amount of the loan. 5 points on a $60,000 loan would be 5% of 60,000, or $3000.

Why do lenders charge points? Why not just raise the interest rate?

Whenever governmental regulation, state usury laws and/or competitive practices prohibit the lender from charging a rate of interest which would make the real estate loan competitive with other fields of investments, the lender must seek some method of increasing the yield for the investors. By charging "points" the lender can bring the real estate loan up to those other investments.

Are points called anything else?

Yes, they are sometimes called the Loan Origination Fee, Commitment Fee, Discount Fee, Warehousing Fee, and Funding Fee.

Who pays the points?

FHA: The buyer is usually charged with the Loan Origination Fee. The Discount Fee can be paid by the buyer or the seller or can be split between both.

VA: The same as for FHA.

Conventional: Points can be paid by the buyer, seller, or split between the two. State it specifically in the contract!

Do the number of points charged fluctuate?

Yes. If rates on mortgage loans are lower than other investments then funds will be drawn away from the mortgage market. Also, when there is a heavy demand upon the money market because of business needs, military requirements or other government borrowing, the result is that money for home mortgages becomes scarce and therefore, more expensive. When this occurs, more points can be charged. Points balance the market. Points are not set by government regulation but are set by each individual lender.

Are points tax deductible?

Points on a home mortgage (for the purchase of, and secured by, the taxpayer's principal residence) are currently deductible if points are generally charged in the geographical area where the loan is made and to the extent of the number of points generally charged in that area for a home loan. If you are in doubt about points being deductible contact your tax accountant.