As with everything else, there are good
points and bad points. Bad points are the ones you pay;
good points are the ones someone else pays. They are
charged by lending institutions as extra upfront, one-time
lump-sum interest, when a new loan is placed.
Each point is 1 percent of a new loan being placed. If
you buy a house for $150,000 and borrow $120,000, one point
would equal $1,200 (not $1,500). Two points would be
$2,400. The term is sometimes used interchangeably with
per cent, as in You'll have a two-point cap, which means
that you'd have a 2-percent cap.
Points are usually paid at final settlement when the loan is
actually made or, occasionally, at the time of mortgage
application (in which case, find out whether they are
refundable if the loan does not go through).
Sometimes you can pay extra points in return for special
favors - a lock-in guarantees that you'll receive the rate in
effect when you apply for the loan, no matter what has
happened to rates in the meantime (but what if rates go down
before your closing?) Or you may be charged extra for an
extension if you don't close within a given period after the
bank commits to making the loan.
When rates are fluctuating rapidly, some borrowers have been
known to make mortgage application at two different lenders:
one with rate locked in, and one without. For whichever
loan isn't eventually chosen, the wheeler-dealer will forfeit
an application fee, usually several hundred dollars to cover
at least an appraisal and credit report. If wide-spread, the
practice would pose a great nuisance to lenders, but it could
give the applicant a chance to choose the more favorable loan
at the last minute.
Points may be paid by either buyer or seller, depending on
their agreement. Points paid by you as the buyer of your
own residence are income tax deductible as interest, in the
year they are paid. Points you pay to purchase income
property must be amortized (deducted bit by bit over the
years) along with the other costs of placing an investor's
loan.
Points paid by the seller are one of the expenses of selling,
and reduce the seller's capital gain on the sale. The
buyer, however, is allowed to take points paid by either party
as an income tax deduction for interest expense for that year.
This Homebuyers Tip was excerpted from:
The Home Buyer's Kit, Third Edition , by Edith Lank, Dearborn
Financial Publishing , Inc., 1994.
ISBN# 0793111145
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