When you apply for an FHA loan here in Texas you’ll be provided with an estimate of potential closing costs. There are lender fees as well as third party fees such as escrow charges and insurance coverage for instance. Two of the lender fees that will appear on the estimate are origination fees and points and both are typically expressed as a percent of the loan amount.
An FHA lender can charge a 1.00% origination charge along with additional lender fees. Expressed as a percentage of the loan amount, a 1.00% origination charge is $2,000 on a $200,000 loan. This is the bulk of the FHA lender’s compensation when approving an FHA loan.
A point, or a “discount” point, is also expressed as a percentage of the loan amount but is used to discount, or lower the interest rate and is not considered as part of the lender’s primary compensation. In fact, there are lending guidelines that specify a discount point must be used to lower a rate and not charged simply to provide the lender with more money. One point on a $200,000 30 year FHA loan will typically lower the interest rate by about 0.25%. FHA lenders offer no point loans as well as loans with various amounts of points and it’s your choice whether or not to pay points.
Working with your loan officer, compare the amount paid for a discount point with the lower payment. Say you paid one point, or $2,000 on a $200,000 loan and lowered your FHA 30 year fixed rate from 3.50% to 3.25%. The difference in monthly payment is $28. You paid $2,000 for the lower payment. If you divide the $2,000 for the point paid by the monthly savings of $28, you’ll “break even” 71 months, not really a good tradeoff.
Rate and fee combinations will vary based upon market factors and sometimes it does make sense to pay points to get a lower rate. Maybe a lower rate is needed in order to qualify for the breakeven period is more attractive. All in all, it’s your choice. Let’s work together to find the most attractive option.