A point is a fee earned by someone involved in the mortgage process (either the loan originator or the lender). One point is equal to 1% of the loan amount. So, on a $150,000 loan, 1 point would be $1,500. Points are the bankers way of talking about money and not making it seem like money. What would you rather pay, 1 “point” or 1% of the amount of your loan? Which one sounds better? The answer to the second part of the question is “NO!” Most of the time, points are an option that allow you to buy down the rate of the loan. In the case of some loan programs for less than perfect credit, or in the case of a “weird” lending program, like a No Documentation loan, there may be a situation where either the lender or broker require you to pay points, because they have no other way to make the profit margin they require. As the risk in the loan goes up, so must the profit margin.
There is another aspect to points that should also be discussed. When you are comparing loan programs from different lenders, you want to make sure you are comparing the “Whole Picture”. Officially, points are Origination Fees, Discount Fees, or Mortgage Broker Fees. HOWEVER, one loophole in the system allows for a “word game” to occur; one that does not have your best interest in mind. Make sure you are comparing the whole loan; cost, rate, and your loan officer's dedication to you. Saving $50 on closing costs when you can never get a hold of the person you are working with is NOT worth it!!!! Click here to learn how to choose a Mortgage Broker/Lender
Note - There are categories on the Good Faith Estimate (see next section) that are not called points, but are really the same thing. As an example, lets assume you are about to obtain a $100,000 mortgage. 1 point would be 1% of this, or $1,000. If there is a fee like an application fee, or an administration fee, or a qualification fee, these are still the equivalent of a point if they add up to $1,000 !!!!! You want to compare the total closing costs, not just what is being “sold” to you as a no point loan. Ex: if a loan with “no points” is going to cost you $5,000 in closing costs, and a loan with 1/2 point is going to cost you $4,500, which one is really the better deal? I would rather pay the $4,500 any day.
