that lenders charge for home loans. Your monthly mortgage payment includes an amount for the interest rate charges and repayment amount for the loan balance.

Mortgage interest rates are tax deductible
for qualified individuals. You can deduct the amount of interest paid during the year if you file Schedule A.

that lenders charge for the cost of borrowing money. Charging points is a standard practice among mortgage lenders.

A point equals 1% of the amount you borrow. For example:

If you borrow $100,000 and pay 2 points, your "cost" to borrow that money will equal: $2,000.

You have the option to pay the points "up-front" at the time of closing or have the lender subtract the points from the amount they lend you.

Example: if you are borrowing $100,000 and select to subtract 2 points from your loan amount, the lender will take out $2,000 and give you $98,000.

For tax purposes,

it makes no difference whether you pay the points up-front or have them deducted from the loan amount.

Points are considered "interest-paid" and may be fully deductible in the year you pay them

Points can raise your APR.

One point is roughly equivalent to one-eighth raise in your initial rate on a 30-Yr mortgage.

Example: a 30-year mortgage rate at 9% and 2 points is roughly equivalent to an APR of 9.25%.

Under a 15-Yr mortgage term, one point is roughly equivalent to one-sixth raise in your initial rate.

Example: a 15-year mortgage rate at 9% and 2 points is roughly equivalent to an APR of 9.35%.

Sometimes you can pay additional points to reduce your interest rate.

A lender may quote an initial rate of 9.25% and another rate at 9.0% if you pay 2 points.

Compare rates vs. points calculation:
www.dinkytown.net

Is it better to pay points for a lower rate or pay the higher rate?

1. It depends on how long are you going to stay in the home.
   
   As a general assumption, it takes about 5-7 years to recoup the cost of points. If you are planning to sell your home within this time frame, it may be better for you not to pay points.
   
   For illustration:
   
   

   Loan amount: $100,000 Term: 30 years Mortgage Loan: 2 points Mortgage Loan: 0 points Rate: 6.50% Payment: $632.07 Cost of Points: $2,000 Rate: 7.00% Payment: $665.30 Monthly Net Increase: $33.23 Recoup Costs: 5 years ($2000 / $33.23 / 12 months) Loan amount: $200,000 Term: 15 years Mortgage Loan: 3 points Mortgage Loan: 0 points Rate: 5.90% Payment: $1,676.93 Cost of Points: $6,000 Rate: 6.60% Payment: $1,753.23 Monthly Net Increase: $76.30 Recoup Costs: 6.5 years ($6000 / $76.30 / 12 months)

   
   
   
2. It depends on the time value of money.
   
   You need to analyze whether you can get a better return by investing your "points".
   
   You must consider your tax bracket and the investment's ROI vs. the interest rate being charged for your mortgage.
   
   Try this calculation from smartmoney.com: click here

Be Prepared to Negotiate Points

There are two parties that play a part in originating mortgage loans:

the mortgage underwriter
the mortgage distributor (or marketer)

Mortgage Underwriter:

the mortgage underwriter is the lender of money. They take money from a pool of funds (in most cases, deposit money) and lend it to the homebuying market at a base percentage.

The base percentage includes the cost for using the money and a margin for profit.

Example:*	Cost of Money:	3.50%
	Servicing Costs:	0.75%
	Other Costs:	0.25%
	Profit Margin:	1.50%
	Base Percentage:	6.00%

*This is a sample of deriving base percentage and does reflect the actual numbers of the industry.

But there are additional costs that the lender must incur. These costs include the marketing or distribution costs in getting the loan money to the buying consumer.

Lenders will then add points to the base percentage to cover their marketing and distribution costs.

Mortgage Distributor:

the mortgage distributor is generally the "retailer of the loan" who meets with you to select and finalize your mortgage product.

These distributors can be the mortgage loan officers of the lending institution or the mortgage broker.

• The mortgage loan officers
  work for the lending institution. They have their offices scattered around the community where you can meet one-on-one to discuss your mortgage needs from the lender they represent.
  
  They are paid a salary and in some cases a commission for every mortgage loan that they originate.
  
  
• Brokers on the other hand work independently of lending institutions.
  
  They work on your behalf of the borrower to shop among multiple lenders for the best product and price.
  
  These players are usually paid a broker fee by the lender when they originate the loan on the lender's behalf.

Compensation for commission and broker fees

are in many cases the points that lenders add to their base percentage rate when they quote mortgage rates.

If you desire to pay zero points, lenders will then raise the base percentage rate to cover their cost of marketing and distribution (with a little profit in there too).

So What's the Point

Negotiate:
note that points and other originating fees are marketing compensation fees for originating your loan — in other words, it is the "profit" for brokers and lenders.

As an informed mortgage shopper, you are in a position to negotiate these "profits" down if you are in a strong qualifying position for a mortgage loan.

A little profit is better than no profit if the lender knows that you can go with another lender.

The APR, expressed as a yearly rate, takes into account not only the interest rate but also points, broker fees, and certain other credit charges that you may be required to pay.

Comparing the APR among lenders is an effective way to shop for mortgage loans. But you must compare similar loan products for the same loan amount and terms.

Compare your true lending costs from Fannie Mae:
www.mortgagetoolshed.com

Compare Points

Points are fees paid to the lender or broker for the loan. The more points you pay, the lower the rate.

Request that points be quoted as a dollar amount so that you will actually know how much you will have to pay.

Also note that points can be negotiated.

Compare Fees

The processing of your mortgage application and closing settlement may require payment for loan origination or underwriting fees, broker fees, and transaction, settlement, and closing costs.

Every lender or broker is required to give you an estimate of its fees. Compare these fees among several lenders. Many of these fees are negotiable.

Compare Numbers

Some lenders will offer lower closing costs for higher up-front points.

When you add it all together, the total cost may be less than a mortgage product with lower up-front points but higher back-end closing costs. These are all negotiating areas with your lender.

Note that your individual situation such as how long you intend to remain in the house and your tax situation (points are tax deductible) may affect your loan comparison.


For more loan comparison information:
www.pueblo.gsa.gov

Download this loan comparison worksheet:
from our download center