Points… What they’re all about

What are points? Points are dollars paid to lending institutions at the time of closing to induce them to make loans on property under existing money market conditions. Points can increase the yield or rate of return lenders get on money they loan.

How are points figured? Very easily. One point is one percent of a new loan amount. So, if a new mortgage calls for “5 points,” it means that 5% of the amount of the loan needs to be paid to the lender when issued. Note that the points are calculated on the amount of the new loan, not the selling price of the property.

Why do points vary? The cost of borrowing money fluctuates according to the demand for money and the supply of money available at any given time. Heavy demands have a major effect on the availability of money. The result is that the supply of money for the home mortgage market is lessened, as these other interests compete for available funds. As the availability of money fluctuates, so do the points necessary to induce lenders to place their money in the home mortgage area.

Who pays the points? Points needed to obtain FHA, VA or Conventional financing may be paid either by buyer or seller and are therefore negotiable. Even though negotiable, in many instances buyers cannot qualify for financing a given house if they must also pay points. Therefore, sellers often see their best interests being served by agreeing to pay some or all of the points needed to make the sale. There are some limitations to the amount of seller contribution under all programs. Consult the lender.

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Copyright © 2004 Dennis Breining