A DISCOUNT POINTS PRIMER!...
...Study your options!
Whether buying or selling a home, the word "discount points" can strike fear in the heart of your checkbook. They are simply a fee charged to either the buyer, the seller, or both, by mortgage lenders.
"Points" were originally created in the 1940’s, when the Federal Housing Administration first began offering "FHA" loans. Those rates were set lower than rates offered on "conventional" loans. To compensate for the lower rates, lenders created a system in which one discount point was equal to 1/8% interest on a mortgage, or one percent of the loan amount.
For example, if interest on FHA loans were 5.75%, when 6% could be charged on a conventional loan, the lender would be short two-eighths of one percent interest on that loan. To make up the difference, an up-front fee of two discount points (equal to 2/8 of 1%) was charged.
Today, discount points are charged on most mortgage loans, including FHA, VA and Conventional. The purpose of charging points today is to increase the lenders "yield" on the mortgage.
Quotations on points should always be obtained when buying or selling a home. Points can then be "locked-in" for a period of time when obtaining a loan.
Who pays the discount points? It’s often negotiable between buyers and sellers, but must be paid by the sellers on some loans. Your real estate agent can explain points in more detail.