Money and Points



Two areas that generate the most confusion and questions about closing on a new mortgage involve points and closing costs.



The points discussion generally begins with something like, “my father-in-law said to never pay points. That’s where they get you”. Your father-in-law may not always be correct. Like any loan feature, whether or not to pay points should be analyzed with regard to your specific situation. First a little background on points. “Points” are calculated as a percentage of the loan amount. The function of points is to get the mortgage lender to loan money at a rate that is lower than the current market. For instance, if the current rate is 6% and you want 5%, the lender will settle for a 5% return if they receive enough cash at closing (points) to bring their yield on your loan to the current market rate. Depending upon the time that you will have the loan and how much a point will discount the rate determines if it is a sound decision to pay points. The main “point” is (as they say) there is no free lunch. If the ad says “no points, no origination fee, no closing costs”, etc. then expect a rate higher than if you paid those fees. If the offered rate looks lower than the going rate, look out for added points or fees.



The good news is that any points or origination fee is tax deductible in the year they are paid, even if paid by the seller. Generally speaking, if you plan to keep a mortgage more than four to five years, you will recover the cost of points during that time period by having a lower interest rate. Another consideration on whether or not to pay points is available funds. If you have the funds available and are looking to have a lower monthly payment, paying points may be beneficial to you.



The other aspect of loan confusion is related to the funds needed at closing. The amount of money required at closing is impacted by a number of factors. The largest component is typically the down payment. Other funds that may be required at closing include lender fees, origination, points, impounds (property taxes and hazard insurance), prepaid interest, loan discount, title fees, recording fees, overnight charges, and survey. If your loan has an escrow account, then 2-3 months worth of taxes and insurance will be collected as well.



There are a number of strategies to reduce the amount of money required at closing. They include:

1. Close at the end of the month – this will reduce the amount of prepaid interest

2. Zero down payment loan programs

3. Remove the escrow account – this will require you to pay your own taxes and insurance at the end of the year

4. Negotiate with the seller to pay some of the your closing costs

5. Increase the mortgage interest rate – this can create lender credits towards closing costs

6. Roll in closing costs into your loan

Understanding points and funds needed at closing are important to you obtaining the mortgage that best fits your situation. Contact Gary Solka at Sente Mortgage to answer any questions and help determine the best option for you.



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Gary L. Solka, Mortgage Banker

Sente Mortgage

Gary.Solka@SenteMortgage.com

512-637-9900

www.SolkaTeam.com