What are “points” ?

One friend tells another, “Yeah, I got a 7.5% loan with two points” and the listening friend looks impressed and replies, “Wow, that’s pretty good.” Neither of them has the foggiest idea what points are, but it sounds good..

One point is 1% of the loan amount. If a loan is $90,000, a point is $900. Two points are 2% of the loan amount, and so on.

Points are pre-paid interest. One point will generally reduce the stated interest rate by 1/8 of a percent. So the friend who got a 7.5% loan with two points, paid the lender 2% of the loan amount at closing, for which the lender gave him a 7.5% rate instead of the 7.75% rate that would have been charged if there was no prepaid interest, no points.

Points may be paid by the seller, or by the buyer, but the buyer is the beneficiary because “points” reduce the interest rate.

There was a time VA loans required the seller to pay the buyer’s points, and VHDA loans still require the seller to pay one point for the buyer, but generally, points are not required. They’re just prepaid interest.

Clear as mud?

Comments

  1. S Simpson says:

    A little more clear on the matter, but I guess that’s why we have loan officers and real estate agents… Im just going to let them handle it & trust they are looking out for me! But thanks for trying! :)

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