Understanding Mortgage Points

Understanding Mortgage Points

Points are the percentage of the loan’s value that brokers ask their clients to pay after closing. For example 3 points on a $100,000 loan will make $3,000.

So called origination points help lenders instantly recover expenses that they had during the closing process not waiting for the payments themselves. Origination points are also often used by lenders who offer lower interest rates to cover the difference. In this way they improve their immediate profit.

A lender may also offer a borrower to pay additional “discount points”. This means that a borrower must pay additional point or two on the loans value to get an about quarter per cent discount on their interest rate. Even though the customer has to pay more right away he will pay less during the life of the loan and save much more than that spread in closing costs.

High competition on the mortgage market has led to some unexpected types of offers. For example, some lenders started to deal with so called “rebate points”. Those are the same as discount points, but vise versa. This means that if a borrower wants a deal with little or no money down, he can agree for rebate points, which means that he will get a percentage of a home’s value at closing the contract but will have to accept higher interest rates in future. This doesn’t usually work for customers’ future perspective but can be helpful or convenient in some situations.

Whatever your situation is, you must carefully examine all possibilities you have and all points charged in all available offers. People with good financial situation can pay more at he beginning and than enjoy low monthly payments. The ones with less than perfect credit history can pay origination points to a lender willing to run a manual underwriting on their case. And the ones who expect income rises in future may improve their current financial situation using the “rebate points” offers.

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