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
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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