When it comes to buying a house, you will find that there are plenty of fees and finance charges. Everything from unspecified “closing costs” (which you should look at carefully) to insurance costs to loan origination fees. But perhaps the most unusual of finance charges to someone unfamiliar with home loan terminology is the the term “points.” Understanding points, though, is important, as this is a home loan term used in virtually every home sale.
Points: a definition
The basic definition (from investorwords.com) of points is: “Finance charges paid by the borrower at the beginning of a loan. One poing is 1% of the loan amount.”
This means that when lenders talk about points, they are telling you how much you will have to pay in this particular category of finances charges. If your loan amount is $130,000, each point is $1,300. So, if your finance charges include 2 points, you will pay an additional $2,600. Points can also be figured in half-points. 1.5 points, for example, is $1,950. Sometimes, if you have good credit, lenders offering special home financing deals will waive your points, offering 0 points on your home loan.
You should keep in mind that points are not the only home loan finance charges. Some lenders charge separate loan origination fees and other closing fees when the home sale closes. These finance charges are on top of any points charged. So, even if your lender touts “0 points”, you should realize that there likely other finance charges. And if you are charged points, there are still plenty of other finance charges on your home loan on top of them.