What Are Points on a Mortgage Loan?

What Are Points on a Mortgage Loan?

If you have ever taken out a mortgage loan then chances are you had to pay some type of fees. It could be for title insurance, loan origination fee, application fee, appraisal fee and there are many others too lengthy to mention. One of the fees you could have incurred is points. If you receive enough points on your loan it can cost you significantly. If you have one point that equals 1 percent of the total loan amount.

Some years ago I used to work for a finance company and we consistently charged customers between 6 and 10 points. Most customers that come to finance companies for any type of loan normally cannot get the loan using more conventional methods because they are not A-1 or prime customers. They represent a riskier customer. In order to offset your risk as a lender then you have to price your product accordingly to offset the risk.

If you take out a mortgage loan for $100,000 and you have 10 points that represents $10,000 in fees which can be astronomical. In recent years I cannot recall any lenders charging these many points on a mortgage loan. For the most part this organization would refinance a loan the customer had with a previous mortgage holder. If you have that many fees that could substantially impact your monthly payment.

A mortgage lender can really make a profit from a customer that pays that many points. There is an advantage for paying points. In some instances the more points you receive the less your interest rate on your mortgage. You may have to work through some figures to see at what point this works in your favor. As a rule of thumb points can work to your advantage if you continue with your mortgage for 3 to 4 years. These points are paid during the loan closing and are expressed as fees right in the loan documentation. From what I remember we used to call these loan servicing fees awhile back. It is always a good idea to talk with a financial advisor to see if it works to your advantage or if it puts you at a disadvantage to receive points on a loan.

All lenders do not assess points In the same manner. It is a good idea to check with several lenders to see which one offers you the most advantageous terms and conditions when it comes to points offered.

Share this article:

Leave a Comment

Your email address will not be published.