Important Information About Mortgage Points
As the average mortgage interest rate has drastically changed over the past year as compared to the two years prior many people are looking at the possibility of discount points on a mortgage. What are mortgage points? And how can they be helpful with a mortgage loan?
Here is important information to know about mortgage points
What is a mortgage point?
A mortgage point offers a sort of trade-off to the potential mortgage borrower. It allows the borrower to pay more money upfront in an exchange for a lower mortgage interest rate. In short, you are buying down interest points.
This means that a borrower pays more money in cash for closing costs to help retain a lower monthly mortgage payment. Borrowers that retain their mortgage for a long time stand to save a large sum of money.
What it means when a mortgage lists points
When checking current mortgage products lenders will often list three different numbers for their product these include the mortgage interest rate, the APR, and points. When you see points listed they may also be noted as mortgage points or discount points. Typically each discount point costs 1% of the overall loan size and can lower the mortgage interest rate by about 0.25%
Understanding mortgage loans that offer points
When you are looking over a mortgage rate quote that includes a points offer where the borrower would pay extra money upfront to obtain a lower interest-rate you want to make sure you are understanding the offer. If you decided to take out a loan for $300,000 you might receive paperwork back that shows what your loan might look like if you purchase points.
It might state how many points the borrower has the ability to purchase and at what cost those points would be. If you were to purchase just half a point on this $300,000 loan this would cost $1500. For example, using a 3.5% interest rate offered to the borrower would lower the interest rate to 3.375%. This may seem like a very small rate percentage change but it can lower the total interest of your 30-year fixed-rate loan by $7500.
The impact discount points have on the mortgage rate and payment
When a borrower pays discount points the bank collects a one-time fee at the closing of the property purchase and in exchange lowers the interest rate on the loan over the entire lifetime. The overall reduction in your interest rate will differ by each bank and what they offer. When it comes to purchasing points it is very important for borrowers to shop around to find the very best offer for them personally.
Is it worth it to purchase mortgage discount points?
Purchasing discount points can be worth the investment if you stay in the home paying on that mortgage long enough to make them worthwhile. Using the same $300,000 mortgage loan example if you purchased one point upfront at $3000 a mortgage interest rate of 3.5% would go down to 3.25%. This would take a monthly payment from $1347 a month to $1305 a month. This is a $ 42-a-month savings.
When factoring in that the borrower paid an extra $3000 of their own cash to save this money the borrower would need to make 72 monthly mortgage payments to equal that $3000 savings. This would take six years and then after that break-even point the lower cost is pure savings over the rest of the life of the loan.
Before paying for points it is always good to determine what the break-even point would be in your particular mortgage loan situation to see if this is a good fit for you and if you have plans to stay in the property long enough to see the break-even point. With the example given above if the borrower did not stay in the home longer than six years it probably would not be worth purchasing the points.
If you would like a full in-depth look at mortgage interest points and whether purchasing them would be a good idea for you you can check out this article on mortgage discount points explained.
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