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Mortgage Rates Without Points

Updated on May 22, 2013
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If you’re in the process of searching for a home to purchase, you’re probably shopping around for a good mortgage rate and trying to get the best rate you can. Published mortgage rate averages can be an important benchmark to help the process. But the question comes up, do these averages reflect points that borrowers pay? Generally, they do -- which means that they don't accurately reflect average mortgage rates without points,

What are Mortgage Points?

Lenders will often give home loan seekers quotes that include loan rates and mortgage points. There are two different kinds of points: discount points and origination points (sometimes called origination fees). A point is basically a fee that is equal to one percent of the loan amount.

Discount Points

Discount points are a type of prepaid interest. The borrower can actually purchase the points to lower the interest on the loan by one-eighth to one-quarter percent. Paying discount points has the added benefit of being tax deductible for the year in which they are paid.

If you plan to own your home for many years, it is usually advantageous to pay off mortgage points. You will receive the benefit of a lower interest rate over time, and lowered payments are always good for your bottom lines. Lending institutions also benefit by receiving more cash up front.

Origination Points

Origination points are more often referred to as origination fees. It is a fee charged by the lending institution, and is used to cover the cost of paying the loan officer for his or her work in processing the loan during the approval process. Generally, origination points are not tax deductible, as the Internal Revenue Service (IRS) considers them to be a fee charged by the lender for a specific service. This includes notary fees, appraisal fees, and preparation costs for the mortgage note.

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Average Mortgage Rates and Points

Now that you’re familiar with the different types of points, you may be wondering if the average mortgage rates you’re researching reflect those points, or if they reflect the mortgage rate without points. They generally reflect points,

When you’re shopping around for a lender, you’ll often see two rates given: the mortgage note rate and the annual percentage rate (APR).

When comparing mortgage rates, the number that is more useful to you, as the borrower, is the APR. The APR is a combination of the interest costs as well as other fees charged by the lending institution. The Truth in Lending Act, a law enacted in 1968 to promote informed use of credit, requires that all lending institutions post the APR along with the note rate in order to disclose any fees that would otherwise not be taken into consideration by the note rate alone. For this reason, the APR is a better point of comparison when shopping mortgage rates.

The APR takes into consideration closing fees, discount points, and origination points. It is calculated by applying the mortgage note rate to the loan amount, to arrive at a monthly payment amount. Then, discount points, origination point, and closing fees are taken into consideration, and averaged over the life of the loan to arrive at an APR.

While APRs are a good basis of comparison when shopping for mortgages, keep in mind that they are more accurate for conventional fixed rate mortgages, as the calculation does not factor interest rate fluctuation. Some costs, such as the appraisal fee, credit report fee, and title fee, are usually not included in the APR, so it is always a good idea to ask the lending institution about those costs when shopping for a mortgage.

Now that you know a little more about the differences between mortgage note rates, APR, and the different types of mortgage points, you should be better able to make an informed decision when you’re shopping for a lender for your mortgage.

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