Mortgage Points and FHA 203b Loans
Just like many privately-insured mortgage borrowers, FHA home loan borrowers are allowed to pay mortgage points, fees paid to the lender at closing in order to reduce their loan’s interest rate. In most cases, one point is equivalent to 1% of the total loan amount. For example, if a buyer wanted to purchase a home with a $400,000 loan, one discount point would cost $4,000.
Despite that, all mortgage points aren’t made equal; one point will typically lower a borrower’s interest rate by one-eighth to one-quarter of a percentage point— and that variation can make a big difference throughout the entire life of a loan. Due to this, it’s essential for borrowers to compare offers, and even run their interest rates through a mortgage calculator in order to determine just how much they’ll save by paying mortgage points upfront.
Borrowers can add mortgage points to the principal of their FHA loan
In addition, borrowers are permitted to shift some closing costs, such as discount points, into their loans, which will reduce their interest rate, but increase the principal of the loan. So, even if you have trouble coming up with enough cash to pay for points upfront, you can still take advantage of a reduced interest rate. Lenders may also pay for some or all of a borrower’s closing costs, in a process known as “premium pricing” slightly increasing the loan’s interest rate to do so. However, this is effectively the opposite of purchasing mortgage points, as it involves raising the interest rate in order to pay less money upfront.
Sellers can also pay for discount points
When it comes to buying a home, almost everything is negotiable— and that includes mortgage points. In many cases, a home seller may be willing to pay a buyer’s mortgage points in order to entice them to purchase a home. However, the FHA mandates that home sellers contribute no more than 6% of the cost of home to a buyer, so total seller contributions must stay under this amount in order to qualify.