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Understanding Points and Fees in Real Estate
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A point (also known as a discount point) is a fee that the buyer must prepay and is equal to 1%
of the total amount of principle borrowed from a lender. For example, if the buyer borrows $200,000,
then 1 point would equal $2,000. Points are basically a commission you pay to a lender for selling
your mortgage to the Federal National Mortgage Association or the Federal Home Loan Mortgage
Corporation. However, if the lender opts to carry the mortgage, they may retain this fee for
themselves. If this is the situation, there is generally some room to negotiate the payment of
points (based on the lender's practices, the selected mortgage type and the term of the loan).
Many buyers choose to pay additional points to reduce their mortgage payments since the number
of points the buyer pays has a direct impact on the interest rate that will be secured for the term
of the loan - the more points, the lower the rate.
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| Example 30-year fixed on $200,000: |
| Rate | Points | APR | Monthly Payment (P&I) |
| 4.000% | 2.0 ($4,000) | 5.444% | $955 |
| 5.000% | 1.0 ($2,000) | 5.730% | $1,074 |
| 5.625% | 0.0 ($0) | 5.877% | $1,151 |
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It must be noted though, that paying points to lower the monthly payment is most beneficial when
the buyer intends to stay in the property for a longer duration. In the above example, a buyer
would pay $4,000 to secure a $995/month mortgage payment whereas paying 0 points would secure a
$1,151/month payment - a difference of $156/month. Therefore, the "break-even" period would be
approximately 26 months ($4,000 / $156 = 25.6).
Understanding Lenders Fees
There are a number of miscellaneous fees paid in connection with a loan and they vary greatly
from lender to lender. A lender may offer to waive one fee but then add another one (i.e. promote
no "document preparation fees" but then add a "processing fee"). So when comparing loans buyers
should evaluate the total cost of all loan-related fees, and to avoid an unexpected charge at
closing, buyers should obtain a list of all the associated fees as early in process as
possible.
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| Copyright 2005. Nancy Clark. All Rights Reserved. |
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