Moving from one place to another, buying a house or getting a loan from a bank requires a lot of documentation. One of the most important decisions that you will have to make is choosing the right mortgage. Just like any decision, this one also requires due diligence because it will affect your financial future. This blog discusses the things you need to know about mortgage points.
How Do Mortgage Points Work?
Mortgage points can be super confusing, which makes it really hard to know whether or not they’re a smart choice for you. Are they really a money-saving deal? Since buying a home is one of the most expensive purchases you might ever make, we’ve found out everything you ever wanted to know about mortgage points.
Before being able to apply for a home loan, you need to know that mortgage points might be offered as an alternative way to lower your overall interest rate when seeking a loan. Discount points are likely to be seen on official home transaction documents like the Loan Estimate and Closing Disclosure. If you choose to purchase one or two of these fancy things, it would cost you a one-time fee as part of your closing costs.
By How Much Does One Point Lower Your Interest Rate?
One discount point usually equals 1% of your total loan amount and lowers the interest rate of your mortgage by around one-eighth to one-quarter of a percent. However, as every individual lender uses an independent calculation method, the actual percentage change will vary.
Let’s analyze the details of the following transaction by breaking it down piece by piece:
For example, if you are buying a $250,000 house and have enough for a down payment of 25% or $62,500. While it can be difficult to come up with an extra 12.5K in cash, one alternative is to pay it in the form of “points.” One point equals one percent of your loan amount so while technically you’re borrowing 100 percent of the value of the home (not relying on a credit score), it’s typically easier to borrow only 80% without a minimum FICO score. Paying 1 point will reduce your loan yield by 0.25 percent. So instead of getting a 3.5% fixed rate mortgage you’ll get one at 3.25%, and since most points are quoted as an interest reduction from the current loan rate you can use this trick with any lender! Your monthly payments will drop from $1,244/month to about $1,218/month for 30 years and that is $26 less per month on a fixed rate conventional mortgage.
Use a mortgage calculator with points, to figure out how much you can save with a rate reduction (and the higher monthly payment). Just plug in your numbers on the original loan. Then open another window, fill out the calculator again, but instead of using the initial 3.5%, use 3.25%. Therefore, the more you buy, the more you prepay and the less interest you have to pay.
