Mortgage Lending: What’s Your Point?

When considering a mortgage, oftentimes a borrower is perplexed by the question of whether to pay a “point” for a certain interest rate offered by their lender. What exactly are points and when should you pay them?

Buying a home is a confusing process, and one of the most confusing prospects is settling on an interest rate. Even when you decide what type of loan you want, you find you still have options as to what rate to lock. Some of these options stem from whether or not you buy down the rate by paying a point. A point is a fee that equals 1% of the loan amount. For instance, if you are buying a $100,000 home, and your note amount is $97,000 (because you’re putting $3000 down), a point would cost you $970.

You can see the points you are being charged on line and 802 of your Good Faith Estimate, and later, on the same line on your HUD-1. This line item reflects fees known as “discount points”, but they truly aren’t interchangeable with origination fees (line 801) even if they sometimes serve the same purpose. If you choose to pay a discount point, you should expect a lower rate than if you didn’t. So, if you’re quoted a rate of 6% 0 + 1, you are paying 1 discount point. If the quote is 6% 1+0, you’re paying an origination fee. And 6% 0+0? You’re paying no fees in either form.

What’s the difference between an origination fee and a discount point? Well a few things. Technically, an origination fee is what you pay the lender or the organization that takes the initial application and processes the loan. A discount point is specifically paid to the lender to buy down or permanently lower the interest rate, and it’s usually a percentage of the loan amount. You can also pay additional points to buy down your rate, not just a flat 1%. You can pay a .5% or 2%. It just has to make good economical sense for you. And it shouldn’t be robbing you blind.

From a tax standpoint, there isn’t much difference. An origination fee is generally tax deductible as long as it’s charged in the form of a “point” or percentage of the loan amount. However, you may ask your lender to charge you a discount point versus an origination fee to keep things neat and simple. Sometimes mortgage lenders charge you an origination fee when technically they should be charging you a discount point. But they’re collecting all the fees anyway and happen to be giving you a lower rate. It really matters most if you are working with a mortgage broker. Mortgage brokers can’t be paid discount points, only origination fees or broker fees. They can collect discount points to lower your rate, but the discount point has to be paid to the mortgage lender with whom they’re doing business. And, this information should be disclosed properly on your Good Faith Estimate


A typical trade off is that a 1% discount point equals about .25% reduction in interest rate. You should be able to easily decipher whether or not it’s worth it to buy your rate down. How long do you plan to be in the home? If not that long, then maybe you should think about a 0+0 quote. If it’s your forever home, then dipping into your wallet and footing higher closing costs might be worth it in the long run.

However, if you look at your Good Faith Estimate and it seems you’re paying too much in origination fees and/or discount points, then you probably are. Say something to your lender. And if he doesn’t budge, you may want to look elsewhere. Go with your gut instinct or call another reputable lender and get a second opinion.

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Email your home loan financing questions to Kristin Abouelata, Home Loan Specialist with Mortgage Investors Group, at question@kristinmortgage.com or call direct: (865) 567-0113 Toll Free: 1-800-489-8910. For more information visit her website at www.kristinmortgage.com Home Loans Plain Talk.

GOOD FAITH ESTIMATES - EVERYTHING YOU NEED TO KNOW BUT WERE AFRAID TO ASK

If you've ever been through the home buying process before, you know that the Good Faith Estimate is one of the most important documents you will review to make a decision about your home financing. Oftentimes, you may request this document from multiple lenders and get completely different looking paperwork and figures. But in essence, there are only a few key factors you should focus on when comparing these documents.

One the these key factors to compare, bottom line, is the amount of closing costs you are being charged. I once had a customer who told me that he was quoted a 6% rate with no discount points and no origination fees. My good faith estimate also had a 6% rate, but I was charging a 1% discount fee charge. I asked to see his good faith estimate from the other lender. The other lender had inflated the closing costs to make up the money that would otherwise have been collected by a discount fee.

Clever, but not necessarily upfront. When it was all said and done, my total costs were cheaper by almost $400. What it boils down to is all secondary market lenders have access to basically the same rate. We just package it differently. By charging my customer the discount fee upfront, my customer earned the benefit of the tax deduction afforded this charge. So, lesson number one, if a quote is completely out of the ballpark from what someone else is quoting, there is probably a good explanation behind it. It's possible that they can really offer something out of the ordinary once in a while, but doubtful.

The other key factor to compare is the payment, but don't get caught up the escrow portion of the payment. Your escrows will be what they will be at closing. No lender has control over what you decide to pay for homeowner's insurance or what your county taxes are. Lenders simply guess at that figure. So, in general, you shouldn't focus too much on "pre-paids." They are what they are, and will be finalized when you get to the closing table. When looking at a payment, it is more important to compare the principal and interest and if applicable, mortgage insurance portions of the payment breakdown. As I said before, your escrows payments (taxes, insurance) will be finalized later.

You should never have to have your credit pulled before someone gives you a good faith estimate, nor should you pay for the estimate. Some lenders will require the aforementioned in hopes of "tying" you to them. The best advice is to find someone you like and trust when shopping for a mortgage. You want someone who will take care of the details and whom you can depend upon.

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