What Are Mortgage Points?
What Are Mortgage Points? Answers.com
When you are ready to start shopping for a new home, one of your first steps will be shopping for the loan that you need. During your search, you will hear the term "points" from most lenders. This naturally leads to the question, "What are mortgage points?" For anyone who has never taken out a loan to buy a home, there are a number of terms that must be learned. Some will end up costing you money, while others can save you money.
What Exactly Are Mortgage Points?
Put in the simplest terms, points are a fee that you as a buyer will be paying directly to the bank or lending institution that is providing you with your mortgage. You pay this particular fee as a way to reduce the interest rate on your loan. Another popular term used to describe this situation is "buying down your interest rates". One point is equal to one percent of your total mortgage amount. In other words, for every $100,000 of your total mortgage, $1,000 will go towards mortgage points. Experts say that this is in essence paying your interest up front before you take out the loan.
Why Pay Extra Money Up Front?
There is only one reason to do this, which is to reduce the amount of money that you owe. Of course, this also means that you are going to have a reduced monthly payment, which is in reality the ultimate goal. In reality, by paying as many points as you can, you are shaving far more from the total amount that you will have paid by the end of your loan period. No matter how you look at it, by doing this, you are going to be saving more money than you are spending.
Do All Lenders Offer the Same Discount?
This is a very important question. The whole idea behind buying your interest rates down is to get a better interest rate on your mortgage. But, do all banks and lenders offer you the same discount rate for each point that you buy? Each lender sets their own discount rates. You need to ask your lender what their rates are like. You may also want to talk to more than one lender to see who will offer the best discount rates and lowest overall interest rates.
Should You Buy Points?
This is a very good question and one of the most common questions that many first time buyers ask. In reality, this depends on how long you intend to remain in the house. Keep in mind that these points reduce your interest rate. If you are not planning to live in your home for more than a few years, then you should use every dime that you have for the down payment. On the other hand, if you are going to stay in the house for 15 to 30 years, then the interest rate discount will save you far more money.
Is Buying Discount Points the Right Choice?
There are several things that you need to take into consideration in order to determine whether or not buying an interest rate discount is right for you. To start with, you need to make sure that you can afford to do so after paying your down payment, closing costs, and moving expenses. If you are not getting a fixed rate mortgage, then there is no point to spending money buying discount points. Is spending money on this discount going to reduce the amount of money that you have for your down payment? All of these questions, along with how long you plan to own your home, must be carefully considered.
Buying a home is likely to be the biggest expense that you will ever have in your life. Interest rate discount points are intended to help you reduce the overall cost of your home and the monthly payments. However, if you are not planning to stay in your home, then this may not be the best idea. If you are not sure, then talk to a financial adviser, and let him explain the differences and how they are likely to affect your decision. You can save money on a long term mortgage this way, but if you are only planning a short term deal, then you may be better off using the money for a bigger down payment.
REALTOR®, SRES®, MRP, AHWD
- 630-669-2401 ext 2834