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What Tangipahoa Buyers and Sellers Should Know About Mortgage Points

August 19, 2009

Whether you are a buyer or seller, it is important to understand what mortgage points are and why or why not you should pay them.  Mortgage points are finance charges paid by the borrower.  However, sellers can pay the buyer’s discount points.

Two Types of Mortgage Points:

Origination points

  • Are a lender’s fee for the cost of giving the borrower a loan.
  • May be tax deductible if they are noted as a percentage on your closing statement.  A fee amount is not tax deductible.
  • Not all lenders charge origination points (fees) – always shop for the best mortgage terms available.
  • Typically, an origination point is 1% of the loan amount.  If you pay more than 1%, you may be overpaying for your loan.

Discount Points

  • A type of pre-paid interest or finance charge.
  • One point is equal to 1% of the loan amount.
  • Discount points are tax deductible.
  • One discount point should reduce your interest rate by .25%.
  • If your interest rate is not discounted, you are paying an additional lender fee.

Why do sellers need to know about discount points?

  • Because your buyer may ask you to pay for points when negotiating their offer.
  • The most important factor for sellers is not what a discount point is but how much it will cost you.
  • A discount point should not exceed 1% of the buyer’s loan, not the selling price of your home.

Why would a seller want to pay a buyer’s discount points?  Well, truthfully, no seller does.  However, today’s real estate market is in the buyer’s favor and this could be a “lose-the-sale” item. S o, the real question is: are you willing to lose the sale over the amount of money the buyer is asking you to pay?

Why do buyers need to know about discount points?

  • Buyers need to know if they are buying a discount on their interest rate or paying a lender fee.
  • Points add to the total funds needed by the buyer to close the sale of the property they are buying.

Why do buyers pay discount points?

  • To make qualifying easier by compensating for a credit score less than 740.
  • To obtain a lower interest rate.
  • A lower interest rate will decrease your payment about $20 (based on a loan amount of $165,000 at 5.25% vs. 5.5%).
  • A .25% lower interest rate will save you about $10,000 (based on a loan amount of $165,000 at 5.25% vs 5.5%).

Buying discount points may or may not be a good financial decision for the buyer.  This depends on your particular situation.  In the long run, a lower interest rate is beneficial.  To help you determine if paying points is a good financial move for you, use this handy calculator.  If you decide that paying points is best for your financial situation, remember that discount points are tax deductible even when they are paid by the seller.

Yvonne Martin, The Martin Team – Let My Family Bring Your Family Home to Tangipahoa Real Estate

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