In my seventh Frequently Asked Questions blog in the ActiveRain contest that Anna 'Banana' Kruchten established in which we are to respond to the 10 most frequently asked questions that we are asked, I will cover a topic that I feel is very misunderstood. When people hear this word, they automatically begin to have very negative thoughts about it. While this blog will most likely not change those preceptions, it will hopefully provide some information that may soften some of the feelings surrounding this topic. FAQ #7 is really more of a statement then a question, but it is very appropriate for this contest and series of blogs:
"FAQ #7 ......... I Don't Want To Pay Any Points?"
I don't blame Borrowers for having the negative feelings that they have about Points. After all they have probably never heard that word use in any way but in a negative way. In this blog I will not avoid the negative aspects of Points, but I will also 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 that 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 downpayment)
- Type Of Property
- Investment Loan
These are all, but the most common reasons why Points are charged, and they represent an additional one time charge that is added to the Borrowers Closing Costs. Bad Points are common in Conventional Mortgages (Fannie Mae & Freddie Mac), but they can also be found on Government Loans like FHA, VA, & USDA. Borrowers are right for having the negative feelings that they have about these Bad Points. They are not getting anything in return for this additional money that they have to pay. Bad Points are a penalty that is imposed on the Borrower because they or the property that 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 that chooses to pay these Good Points. They are being rewarded with a lower Interest Rate for the extra money that 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 for selecting a higher Interest Rate the Lender gives the Borrower a Credit that is 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.
Previous FAQ's Blogs.
Info about the author:
George Souto is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308 or firstname.lastname@example.org