CHAPTER V -- DON'T BE SURPRISED BY THESE COMMON ADDED COSTS

LESSON 9: POINTS

When people want to find out how much their mortgages cost, lenders often give them quotes that include both loan rates and "points." In an ideal world, they're told about closing costs, too, but we'll talk more about that in Lesson 21. So, what exactly is a point?

In the simplest terms, a point is a fee equal to 1 percent of the loan amount. A 30-year, \$150,000 mortgage might have a rate of 7 percent, but come with a charge of 1 point, or \$1,500. (\$150,000 X 0.01 = \$1,500)

But there are two kinds of points borrowers can pay:
Discount points: These are actually prepaid interest on the mortgage loan. The more points you pay, the lower the interest rate on the loan and vice versa. Borrowers typically can pay anywhere from zero to three or four points, depending on how much they want to lower their rates.
This kind of point is tax-deductible.

 Discount points show up in the Annual percentage rate (APR) calculation. You pay these points at closing -- which increases the money you need to bring to the transaction.

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