Points are dollars paid to lending institutions at the time of
closing to induce them to make loans on property under existing money market
conditions. Points increase the yield or rate of return lenders get on money
they loan.
How are points figured?
Very easily. One point is one percept of a new loan amount. So,
if a new mortgage calls for "5 points," it means that 5% of the amount of the
loan needs to be paid to the lender when issued. Note that the points are
calculated on the amount of the new loan, and not the selling price of the
property.
Why do points vary?
The cost of borrowing money fluctuates according to the demand
for money and the supply of money available at any given time. Heavy demands,
etc., all have a major effect on the availability of money. The result is that
the supply of money for the home mortgage market is lessened, as these other
interests compete for available funds. As the availability of money fluctuates,
so do the points necessary to induce lenders to place their money in the home
mortgage area.
Who pays the points?
Points needed to obtain FHA, VA or conventional financing may be
paid by either the buyer or seller, and are therefore negotiable. Even though
negotiable, in many instances buyers cannot qualify for financing a given house
if they must also pay points. Therefore, sellers often see their best interests
being served by agreeing to pay some or all of the points needed to make the
sale. There are some limitations to the amount of seller contribution under all
programs. Consult the lender.
How about adding the points to the selling price?
This just doesn't work, because an inflated selling price will be
greater than the appraised value the lending institution determines for your
property ... and few buyers can or will agree to purchase a home for more than
it's appraised value. Besides this, if your home is offered for more than its
market value it will generate little, if any, interest from buyers in the
marketplace.