What are Bozeman Mortgage Loan Points aka, “Mortgage Points” or “Discount Points?”
What Is A Point?
One point (essentially prepaying interest) allows you to buy down 1% of the total of your Bozeman home mortgage loan. A one point buy-down on a $300,000 loan would cost you $3,000 at closing and would result in up to a .25% reduction of your mortgage interest rate during the life of your mortgage.
Example: if your financial institution grants you a mortgage loan rate of 3.5%, after buying-down your new mortgage loan rate by one “point,” which costs 1% of your $300,000 mortgage ($3000), your new mortgage loan rate is decreased by ¼%, so:
3.75% — .25% = 3.50% is your new, reduced interest rate, which cost you $3,000.
At the closing (the moment you own your new property) of your Bozeman real estate transaction, you pay your lender a fee to purchase points to buy down your interest rate, which will reduce your monthly mortgage payment. This is also called “buying down the rate.”
Why Do Lenders Charge Points?
Whenever state usury laws, competitive investment world practices, or federal regulations exclude a lender from charging you a mortgage interest rate that would make their real estate loan competitive with other types of investments, like stocks and bonds, options, commodities etc., a real estate mortgage lender will seek another method to increase the monetary yield on his loan to you for his investors.
By offering (charging you) points, your lender can bring your rate down AND increase the yield of your Bozeman real estate mortgage loan to investors.*
What Are Some Other Names For Points?
Mortgage Points, Buy-Down-The-Rate, Discount Points, Commitment Fees, Discount Fees, Funding Fees.
Who Pays Points?
Veteran’s Administration Funding Fee (VA):
A Buyer is usually charged with both the Loan Origination Fee and the VA Funding Fee., which lowers the cost of the loan as points do.
Farm Home Administration (FHA):
The Buyer is usually charged with the real estate Loan Origination Fee; the Discount Fee can be paid by Buyer or Seller.
Points can be paid by the Buyer, the Seller, or split between the two. Ensure that you state on the Contract of Sale: “the City or County or State Government Sponsored Loan and the government entity’s description.”
Is There Fluctuation In The Number Of Points Charged?
Yes. If rates on mortgage home loans are lower than other *investments (such as stocks, options, bonds, etc.), funds will be drawn away from the mortgage loan market.
In addition, when heavy demand is placed upon the money market due to other business demands, like US military spending or other types of federal government loan writing, the amount of federal funding available for home mortgages diminishes and, consequently, borrowing federal housing funds becomes more expensive.
If any of these scenarios happens, you may be charged additional points because points balance the fund market and are not set by government regulation, but, instead, points are established individually by each mortgage lender.
How Does VA or FHA Financing Effect Sellers?
Homes can sell faster with VA or FHA loans because more buyers can qualify because these loans tend to require lower down payments. These also tend to have lower interest rates and tare a long-term home loan with some of the lowest monthly payments of all mortgages.
On a sale, sellers receive cash for their real estate equity, which they can use to reinvest in a new home or other real estate investment. The purpose of these VA and FHA real estate loans is to provide buyers the opportunity to buy a home with minimal cash investment and this provides a larger buyer market for real estate sellers.
Can I Deduct My Purchased “Bozeman Real Estate Points” On My Income Tax?
According to the IRS, “Points are allowed to be deducted ratably over the life of the loan or in the year that they were paid. You can deduct the points in full in the year you pay them, if you meet all 9 IRS requirements.” If you are in doubt about the deductibility of the real estate points you purchased, contact your tax preparer or CPA.