DISCOUNT POINTS - Additional charges made by a lender at the time a loan is made. Points are measured as a percent of the loan, with each point equal to one percent. These additional interest charges are paid at the time a loan is closed to increase the rate of return to the lender so as to approximate the market level.
What is a Point?
One point is equal to 1% of the NEW loan amount.
Why Do Lenders Charge Points?
Whenever government regulation, state usury laws and/or competitive practices prohibit the lender from charging a rate of interest which would make the real estate loan competitive with other fields of investments, the lender must seek some method of increasing the yield for the investors. By charging "points", the lender can bring the real estate loan up to those other investments.
FHA: Buyer is usually charged with the Loan Origination Fee; the Discount Fee can be paid by Buyer or Seller. VA: Buyer is usually charged with Loan Origination Fee and Funding Fee. Discount Fee must be paid by Seller.
Conventional: Points can be paid by the Buyer, the Seller, or split between the two. Stated on Contract of Sale!
Do the number of Points Charged Fluctuate?
Yes. If rates on mortgage loans are lower than other investments (such as stocks, bonds, etc.) then funds will be drawn away from the mortgage market. Also, when there is a heavy demand upon the money market because of business needs, military requirements or other government borrowing, the result is that money for home mortgages becomes scarce and more expensive. When this occurs, more points can be charged. Points balance the market. Points are not set by government regulations but by each lender individually.
On VA Loans is there any way to Lock in the Number of Points?
Not without jeopardizing the sale. Even when a lender stipulates in writing the number of points to be charged, that guarantee states "if the interest rate is not changed by the government." Points charged on an FHA or conventional loan are usually not changed from commitment time to settlement.
Is FHA or VA Financing Unfair to Sellers?
No. Homes can sell faster because more buyers can qualify with the lower down payment requirement and lower interest rate - long term loans with lowest monthly payments. Sellers receive all cash for their equity to reinvest in a new home or other investment. The purpose of these loans is to provide purchasers the opportunity to buy homes with minimal cash investment thus providing a bigger market for sellers.
