Closing points are one component of a standard mortgage process. Within the process of transacting a mortgage, points are awarded as part of the calculation of the total amount of the loan. At the time of closure, those points are paid to the lender that agrees to underwrite the loan, or to the broker that served as the point of negotiation between the lender and the borrower. Sometimes known as discount points or mortgage points, closing points may be used to lower the overall rate of interest that is associated with the mortgage loan.
A number of factors can go into determining how closing points are awarded. Along with the purchase price, there is also the value of the asset used as collateral for the loan, the amount of the closing costs associated with the mortgage, and even the down payment that is provided by the loan applicant. Schedules to determine the accumulation of points may vary somewhat, based on industry standards and the laws of the land in which the real estate transaction is taking place. Both lenders and real estate professionals keep abreast of any changes in local or national laws that have an impact on all phases of the real estate financing process, including the accumulation and payment of closing points.
The nature of the mortgage agreement may have some impact on just what type of benefits are created with the closing points. In some instances, the points awarded on a mortgage granted for the purpose of buying a new home provide a tax advantage, in that all the points can be used as a tax deduction. That is not necessarily the case with mortgages written to refinance an existing mortgage debt; here, the points are typically pro-rated over the life of the refinanced mortgage loan, making it possible to receive a small amount of benefit each tax period.
Depending on the nature of the real estate deal, the total amount of closing points involved may be significant. In some nations, the calculation and awarding of the points is required as part of the process for approving and closing a mortgage. Since the process for awarding points will vary from one country to another, it is important to work with a real estate professional with a solid understanding of current real estate laws in the area where the property is located. This makes it much easier to rest assured that the closing points are calculated properly and subsequently paid to a party that is approved by law to receive them.
