If you have ever shopped around for quotes for a loan for a personal or investment property, you have more than likely heard the term “points”. So, what exactly are points? Paying points is a technique of paying interest upfront in order to get a lower interest rate on a fixed-rate home mortgage. Essentially, the more points you pay, the lower your home mortgage rate will be throughout the course of the loan. Each point is based upon one percent of the total amount of the loan. Specifically, there are different types of points. There are discount rate points, and there are origination points.
Discount points are like prepaid interest on your loan that you are getting for your new home. The number of points that you choose to buy will depend on how much you want to reduce your interest rate. Under certain conditions, buying mortgage points are tax-deductible. Origination points are charged by the lender to pay for the costs of making the loan. They would be tax deductible only if it was utilized to get the home mortgage and not to pay other closing expenses.
When choosing whether to buy down points, homebuyers must consider the following. The more points you can pay upfront, the lower your monthly mortgage payment will be.
Also, keep in mind that some lenders do not charge the same amount for each point. Notably, some lending institutions will charge you one point while others may charge you two or three. Whether or not you should purchase points, depends on a couple of different factors.
Points On Hard Money Loans
A hard money loan is a short-term property loan, primarily secured by real estate. They are funded by private investors. Hard money loan rates can go up to 15% with three- to 36-month terms. Points to close on hard money loans normally fall between 2% and 10% of the loan amount. Pricing is primarily based upon the risk, equity, and experience of the borrower.
Hard Money Loan Minimum Qualifications
Hard money loan provider underwriting is more flexible than conforming lending institutions in terms of borrower’s qualifications. If you are obtaining a fix-and-flip, loan providers will generally want to see previous real estate experience or substantial equity in the property that you are purchasing.
Borrowers with substantial real estate experience and who have evidence of completed fix-and-flips should be able to receive a lower rate compared with a new investor who doesn’t have a track record of success.
This is because the lending institution considers the brand-new investors riskier than knowledgeable investors and passes this risk on with a slightly higher rate.
Is Paying Points A Good Idea?
The key point, when deciding whether to pay points, is that the longer you plan to have the loan or the property, the more sense it makes to pay as many points as possible upfront. On the other hand, if you need the least expensive possible closing expenses, selecting to not buy any points is probably the best way to go.
Paying points at closing can decrease your interest and bring you savings.
You can find various online calculators that can help you see the differences that points can make with any particular loan. You simply input the info that you have, such as the amount of the loan, the length of the loan, interest rate, and points paid, and the calculator will generate the figures. This is an excellent way to get quick details on points and how they can affect your loan in the long run.
Overall, if you plan on remaining for a much shorter time duration, then you may wish to reduce your costs in other ways instead of buying points. This can be done through paying a larger deposit, making certain your total debt obligations are low and your credit score high, or by simply paying more every month.