Mortgage Basics: Paying Points on a New Home Loan

by Kelly Richardson
Loan Page Columnist

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One of the key pieces of information that should be heeded when applying for a mortgage is the number of points associated with deal. If you are in the market for a new home loan, you should know that paying points is expected, but not required.

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What Are Points?

According to the Center for Responsible Lending, a predatory lending watchdog, points are fees the borrower pays the lender at the time the loan is closed, expressed as a percent of the loan. For example, if you are stipulated to pay two points on a $150,000 loan, that means you will be required bring that amount with you to closing.

While many home loans have points associated with them, the lender is able to adjust those points or remove them completely should the situation warrant it. The U.S. Department of Housing and Urban Development reports that you can pay fewer points in exchange for a higher interest rate or more points for a lower rate.

New Home Loans: How Do Points Work?

Here are a few things about points that you should be aware of when considering home loans.
    Full Disclosure: A document called the Truth in Lending Disclosure Statement will list any points associated with your mortgage. Long and Short: As a rule of thumb, if you are going with a long term on your new home loan, you will want to pay points early. Negative Points: Points can even be paid to you by the lender in order to put cash in your pocket at closing.

How to Manage Points on a Mortgage Loan

The key to the point system is knowing how to manage it. Paying points isn't necessarily a bad thing. It's just something that must be navigated during the new home loan process.

Here are a few ways you can manage points.

  • » More Options: If you are uncomfortable with the points listed in your disclosure, ask your lender for other options. Most will gladly reduce points and raise APR in return.
  • » Seller Pays: The paying of points is an aspect of the deal that can be negotiated. The seller can sometimes be persuaded to pay lending points for the borrower.

Knowing how to work the points of a mortgage deal is a good way to ensure you will get the most favorable terms possible.

Sources
Center for Responsible Lending
Mortgage Bankers Association
U.S. Department of Housing and Urban Development

About the Author
Kelly Richardson covers the local education and technology scenes in major cities across the country. His articles appear in educational journals, periodicals, and e-zines.

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