# Should I pay points?

Many
home buyers are adverse to paying "points". Some buyers think
mortgage points are a sinister plot to extract extra money from the
customer, or just an extra expense. Here's a down to earth explanation
of mortgage discount points; also known as origination fees. The mortgage
lender can offer you a lower
interest rate if you are willing to PRE-PAY some of the interest
at closing, called "points".

Let’s say the mortgage lender wants to earn $100,000 interest over the
life of the loan, so the loan officer offers you a ZERO point rate of
6% and will earn $100,000 over the life of the loan, or the lender could
offer you an interest rate of 5.75% and one discount point.

A discount point is one percent of the mortgage loan (i.e. $100,000
X 1% = $1,000). So if you’re willing to pay $1,000 at closing, you will
receive a lower interest rate . . . because you are prepaying some of
the interest owed on the loan. Generally speaking, the more points,
the lower the interest rate, because the mortgage company is receiving
some of the interest up front. Needless to say, a lower interest rate
means that the monthly payment will be lower.

## How to calculate mortgage points

Example: Interest Rate - 6.00%

Term - 30 Years

Principal & Interest Payment - $599.55

Cost - " 0 "at closing

TOTAL INTEREST PAID OVER THE LIFE OF THE MORTGAGE

$ 115,838.19

Example: |
Example: |
Example: |

Should I pay points on a mortgage loan? | ||

Example: |
Example: |
Example: |

As you can see, paying points can actually save you money over the
life of the mortgage. The decision to pay mortgage points is a decision
between you and the mortgage company and a good calculator

## Mortgage points can improve your debt to income ratio

Lenders determine the maximum monthly mortgage payment using a formula called debt to income. Buying points can lower the mortgage payment, which in turn can improve your debt to income ratio.

Frequently Asked Questions about mortgage points

## Are mortgage points paid up front?

The points are usually paid at closing/settlement for purchase loans. For refinance loans, the points can be financed into the new loan or paid in cash.

## Are mortgage points part of closing costs?

Yes

## Can the lender pay your discount point(s)?

YES! Mortgage lenders are permitted by the loan programs to buy down your interest rate. Lender paid discount points is an easy way to lower your interest rate, provided you can find a willing lender.

## Can the seller can pay your discount points?

YES! The mortgage programs (i.e. FHA, VA, USDA & conventional) permit the seller to pay a percentage of the buyer's closing costs, including discount points (seller assist). Here's how discount points can reduce your monthly mortgage payment even though the mortgage amount is HIGHER! In this example, the home is offered for sale at $103,000. We'll ignore the down payment for simplicity and assume your are able to obtain 100% financing (no down payment mortgage). If the seller is willing to sell you the house for $100,000 and you obtain a no point loan at 5%, your monthly payment for a 30 year fixed rate term is $536.82 (principal and interest). But if you make a full price offer and ask the seller to pay 3 points. The discount points lowers your interest rate and consequently brings down you monthly payment.

Interest Rate | 5.00% | 4.25% |
---|---|---|

Term | 30 | 30 |

Mortgage Amount | 100,000 | 103,000 |

Payment | 536.82 | 506.70 |

## How many points can you buy down on a mortgage?

There is no mortgage point limit, however, the impact of mortgage points on the interest rate tends to deteriorate after 3 to four discount points.

## Did you know that there is a limit on the amount of points you can pay?

If a lender is offering a "Qualified Mortgage"? Under the Consumer Financial Protection Bureau (CFPB) rules, only Qualified Mortgages have a limit on points and fees. Lenders are not required to make Qualified Mortgages, so they can charge higher points and fees if they choose.

To make sure borrowers don't pay very high fees, a lender making a Qualified Mortgage can only charge up to the following upfront points and fees:

**For a loan of $100,000 or more:**3% of the total loan amount or less.**For a loan of $60,000 to $100,000:**$3,000 or less.**For a loan of $20,000 to $60,000:**5% of the total loan amount or less.**For a loan of $12,500 to $20,000:**$1,000 or less.**For a loan of $12,500 or less:**8% of the total loan amount or less.

SOURCE: Consumer Financial Protection Bureau

## Shopping for the lowest interest rate

Be careful when calling around for the "lowest interest rate". Some lenders will give you an unbelievable interest rate, but not tell you that there's discount points associated with the quoted rate, or the interest rate is not guaranteed.