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Loan Points
Loan points are a part of the total mortgage price a borrower pays when accepting a home loan from a lender.
It is an upfront cash payment to a lender as it is part of settlement costs.
Together with interest rates, points are classified as a cost of credit.
Due to this, they are always expressed and charged as a percentage of the total loan amount.
And when negotiating with lenders for discounts on price, interest rates and points tend to be correlated.
For example, lenders might offer to lower interest rates for extra points, or lesser points in exchange for higher interest rates.
When negotiating with a loan officer, interest rate and points are usually inversely related.
This means that a borrower could probably get a lower interest rate if they are willing to pay more points. And vice-versa.
The general advice is that a borrower with a short time horizon, for example if he will sell the house within 3 years, paying lesser points and accepting higher interest rates will be more worthwhile.
Financing points
When a borrower is short of cash, he might request that lender to finance the point incurred on his loan as well.
When this happens, the cash amount equivalent to the points liable is added to the original loan amount, effectively increasing the loan size.
The amortization of the loan which determines the monthly required payment will then be based on this larger loan size.
Negative points
Sometimes, a situation of negative points can even arise.
For example, a lender offering 1 lesser point on the loan when the loan already do not have any points.
When this happens, the point will be a credit that the borrower can use to offset the settlement costs.
Lastly, don’t forget that point paid in cash are tax deductible.
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