Points Points are dollars paid to lending institutions at the time of closing to allow lenders to make loans at rates lower than existing money market conditions warrant. One point equals one percent of a new loan amount. If a new mortgage calls for five points, it means that five percent of the amount of the loan needs to be paid to the lender at closing. Note that points are calculated on the amount of the new loan, and not on the sale price of the property. The cost of borrowing money fluctuates according to the demand for money and the supply of money available at any given time.
Heavy demands have a major effect on the availability of money.
The result is that the supply of money for the home mortgage market is lessened, as it competes for available funds. As the availability of money fluctuates, so do the points lenders require to place their money in the home mortgage area. Points needed to obtain FHA, VA or Conventional financing may be paid by either the buyer or the seller, and are therefore negotiable. FHA, however, limits the seller contribution to a maximum amount of points. Even though negotiable, in many instances buyers cannot afford financing a given house if they must also pay points.