When you take out a loan backed by the Federal Housing Administration, or any other kind of mortgage, you may need to pay points to obtain the rate that you desire. Lenders must disclose charges for points after you submit an application and re-disclose this information at closing. If you have already closed on your FHA loan, you can review the closing statement to see what points, if any, you paid.
Mortgage points come in two varieties -- discount points and origination points. Discount points reduce the interest rate on your loan via making a prepaid interest payment. You do not have to pay discount points but many people choose to do so in order to get a lower interest rate. Origination points are lender processing fees that cover the costs associated with underwriting your loan. In the past, origination fees were capped at one percent of the loan amount, but as of 2010, the FHA no longer caps origination points -- except for reverse mortgages and FHA rehab loans.
Good Faith Estimate
Lenders often quote mortgage rates to you before you submit an application, but a lender cannot assure you of a rate until you have actually submitted the application. Within three days of applying for the loan, your lender must provide you with a Good Faith Estimate. This document explains how much the loan should cost, based on your lender verifying all of the information listed on your application. The GFE includes a variety of information, such as your interest rate and details of any points that you must pay.
When you close on your loan the lender must provide you with a closing statement. The U.S. Department of Housing and Urban Development requires lenders to include certain information on the closing statement -- such as details of any fees you paid. The closing, or HUD, statement separately lists the dollar amount of any discount or origination fees you paid. Some lenders bundle together non-negotiable expenses -- such as property tax -- with lender-charged fees as part of your origination fee on the GFE. However, on the closing statement, the lender must itemize these charges so you can clearly see what you actually paid to the lender versus what you pay to your insurance company or local tax authority.
Points increase the upfront cost of taking out a mortgage and many people are therefore reluctant to pay points since FHA loans are mostly targeted at people who have minimal funds to make large down payments. However, you can deduct the amount that you spent on FHA mortgage points from your taxable income but only if you paid the points for a loan secured by your primary residence. Additionally, you can only deduct points that are for lender fees and interest charges and not points charged in place of standard expenses such as taxes and insurance.
- FHA: What You Should Know About FHA Loan Origination Fees
- The Federal Reserve Board; A Consumer's Guide to Mortgage Settlement Costs; August 2010
- Bankrate.com; Paying Mortgage Discount Points - A Primer; Holden Lewis; January 2006
- Internal Revenue Service: Home Mortgage Points
- Lending Tree: Good Faith Estimate