Math and the Consumer’s Money
How are “points” determined in a real estate transaction?
When buying a home through a real estate group or bank, “points” may be paid by the borrower at the time a loan is made. This is usually to get a lower interest rate, because the lender often offers certain rate/point combinations that may help the homeowner save money. Actually, points usually refer to the commission charged by the mortgage broker or the loan fee charged by the lender when the loan is made. Points can be also negative, in which case they are called “rebates” from the lender to the borrower and are often used by borrowers to defray other settlement costs.
In general, each point is 1 percent of the loan amount. For instance, three points would be equal to 3 percent of the total loan amount. There is no set number of points offered by a lender, as it is not controlled by any laws. For example, on a $100,000 loan, one point is equal to $1,000; 10 points is equal to $10,000. A homeowner looking for a loan should try to find a mortgage broker or lender that charges fewer points. Some financial institutions might even be willing to negotiate for lower points. But beware of lenders offering no or zero points, because they usually charge much higher interest rates than those offering loans with points.
Although it is a matter of mathematics and a person’s budget, there are some very general guidelines when choosing a mortgage. Low-rate, high-point loans are usually used by borrowers who can meet the down-payment cash requirement and either want to stay in a house a long time or want to reduce their monthly mortgage payments. High-rate, low-point combinations are for borrowers who don’t expect to be in their houses very long, or who are short on cash.