Mortgage points
What do you mean by point?
The concept of point is very fundamental for the clear and in depth understanding of mortgage loans and the point is also known as the discount points. Point is very important for calculating the annual percentage rate that is applicable to a particular mortgage loan as one point equal to one percent of the principal amount of the loan. Mortgage point is a type of fee that is paid at the time of loan closing by the lender of the loan and there are two types of points; the origination points and the discount points, so the points should not be confused and mixed with origination fees. Since one point is equal to one percent of the loan amount, if a mortgage has two points on the loan of US $200,000, the lender will end up paying US $4000.
How origination points differ from the discount points?
The origination points are different from the discount points with regard to their areas of application. Origination points are related to the process of origination and are generally applied so as to recover certain expenses incurred at the time of origination of the mortgage loans. Thus, the remuneration given to the loan officer is calculated using the concept of origination points and some lending organizations prefer negotiating the origination points either entirely or in parts depending upon the policy of every institution.
However, discount points are a very different concept as they are primarily used in getting the lower interest rate or in other words, the discount points are used for the rate buy down. It is widely believed about the discount points that they help in lowering the interest rates and some analyst also provide the objective percentage decrease they bring in the interest rates; for the fixed rate, the decrease in interest rate is twenty five basis points and for the variable rate mortgages the decrease is thirty seven and a half basis points, thus quite a significant decrease in the mortgage rate of mortgage credit. The best thing about these loans points is that these reduce the interest rates for the entire tenure of the mortgage loan and thus reducing the costs of financing. The formula used by the lending organizations for determining the discount loan points is somewhat flexible in comparison to the one used for origination points.
Which one is better, the discount points or the origination points?
When we talk about the two types of credit points, the question immediately pops up in mind that which one of these points is better to pay? The significance of one type of mortgage points over the other is greatly dependent upon the tax position of the person as there is no absolute advantage associated with one type over the other. But under certain conditions, the discount credit points may be tax deductible, but the origination loan points are not tax deductable under any circumstances. In United States the regulations pertaining to tax deductibility of discount points are laid down in Schedule A of the IRS 1040 tax return and the similar provisions also exist in other laws as well. If the tax deductions related to points are not utilized for any tax related issues then the person is not allowed to file these deductions in tax returns. However, these deductions are not possible without the proper advice of the tax adviser. If you are eligible for any tax deductions with regard to mortgage points, it is time to consult your tax adviser.
Why do some lenders go for the home mortgage points charge when others do not?
The lenders have to make a choice regarding the application of origination points because almost all of the prices of mortgages have the share of discount points. The offer by lenders can have absolutely no points or can have one point, two points or even more. Thus, the higher the point paid by the buyer, the lower is the interest rate charged by the lender and the cheaper the mortgage becomes in term of the cost of funds or interest charged. However, it is not always the case that the points charged are the whole numbers because many lenders charge the fractions of points like 1.25 points, 1.75 points, 2.25 points, 2.5 points etc.
The advertisements from the lenders are very wide in scope where certain lenders focus on their no points interest rate while others try to sound like the cheapest source of funds available by having certain points attached to the overall costs. So, as a borrower you need to be aware of all marketing gimmicks and better analyze the entire cost structure of mortgage loan offered to you. The in depth understanding of the fee structure will help you make a better decision. To further elaborate on this issue, take a comparison of two types of mortgage loans offered by two lenders, one offering10% interest rate with 2 discount point but no origination point while the other has to offer 10% interest rate with 3 origination point and no discount point. The result is clear, the first offer is a better one to accept and move forward with.
Apart from the home mortgage points, there also exist insurance points that have their own significance and importance. There is also specialized points calculator available to facilitate the people through the entire process of calculating and charging home points. If you are interested in knowing more about point mortgages, buying points and particularly East mortgage, log on to a good search engine and you will come across various interesting facts about the topic under discussion. Also, there is a wide pool of information available on no points mortgages that are worth reading and understanding.
Each type of the mortgage points has its own functions and significance, but discount points are considered better in most cases than the application of origination points.