Why Do I Have To Pay Points?

Anna 'Banana' Kruchten is hosting an ActiveRain contest this month titled "FAQ Break Into Summer Organized Contest" in which she is challenging us to write 5 new posts answering 5 consumer FAQ's.  This is an easy one for me, because there are at least twice that number of questions I am asked on a regular bases by consumers.  I have already posted a blog on the most FAQ I get from consumers  "What Do I Need To Do To Get Pre-Qualified For A Mortgage?"  So lets go on to the second question I am asked most often.

Why Do I Have To Pay Points?

Not Everyone has to pay "Points", but depending on the loan program, "Points" maybe an automatic charge.  For example Fannie Mae will charge "Points" on all Fannie Mae backed loans, unless the Borrower is putting down 40% or more, no matter how good their credit score are.  Also a Lender may not have a "0 Point" interest rate on a particular day.

"Points" are probably the most I misunderstood component of the mortgage process.  When people hear the word "Points", they automatically begin to have very negative thoughts about it.  While this blog will most likely not change this perception about "Points", I hope it will provide information that may soften some of the negative feelings about "Points.

Let me start off by saying I don't blame Borrowers for having negative feelings about Points.  After all they have probably never heard the word "Points" use in any way but in a negative way.  In this blog I will not avoid the negative aspects of "Points", but I will attempt to show how "Points" can actually be a very positive thing.

First I will not only address but also reinforce the negative aspects of "Points", or as I call them "Bad Points".  Bad Points are Points a Borrower has to pay in the form of a penalty.  Bad Points are charged to a Borrower for various reasons like:

• Low Credit Scores
• High Loan To Value (small down payment)
• Type Of Property
• Investment Loans

These are not all, but the most common reasons why "Points" are charged, and they represent an additional one time charge to a Borrowers Closing Costs.  "Bad Points" are common in Conventional Mortgages (Fannie Mae) as I previously mentioned above. But "Points" can also be found on Government Loans like FHA, VA, & USDA.  Borrowers are right for having the negative feelings they have about these "Bad Points".  They are not getting anything in return for this additional money they have to pay.  "Bad Points" are a penalty that is imposed on the Borrower because they or the property they are purchasing present a high risk.

But "Points" can also be "Good Points".  For example:

• A Borrower can pay "Points" to lower his/her interest rate.  These are "Good Points", because they lower the Borrowers interest rate, and it is the Borrower who chooses to pay these "Good Points" or not.  They are being rewarded with a lower interest rate for the extra money they are paying.

• "Good Points" can also be received in the form of a credit.  A Borrower can choose to receive a higher interest rate, and in return the Lender gives the Borrower a Credit which can be used to reduce the Borrowers Closing Costs.  A Borrower would choose to do this because they do not have enough money for Closing Costs, and the Seller refuses to contribute towards the Borrowers Closing Costs.  Or the Borrower has enough money for Closing Costs, but it will leave them without any money for an emergency, so they would select this option, and get to keep a little bit of their money.

So as you can see "Points" are not all Bad, in fact they can be very Good if used in a positive way.