Ever wonder about Points when you are looking for a mortgage? If not, maybe it is something you may want to understand and how it works in your overall cost of your monthly payment.
What Are Points, Anyway?
A quick quiz: mortgage “points” are
a) certain charges paid to obtain a home mortgage
b) the gross profit for the originator of the loan
c) up-front mortgage interest fees to reduce the interest rate
d) each equal to 1 percent of the total loan amount
e) loan origination fees
f) charged by a lender to raise the yield on a loan when money is tight, interest rates are high, or there is a legal limit on the interest rate that can be charged on a mortgage
g) come in two varieties
h) all of the above
Answer: h.
When shopping for a mortgage for your new home you should ask about points as these are upfront costs that are paid by you either in cash or generally will be included in your loan and can work to your benefit, or may work against you. A point is the percent of the mortgage amount you pay to the bank to originate the loan. For example, a one percent point on a $300,000 loan is a cost to you of $3,000. This amount is usually added into your loan and will be paid back over time as a part of your monthly payment. Generally if you decide to pay points, your mortgage interest rate may be lower as you are basically prepaying interest. Paying points may be beneficial to you if you plan to stay in your home long term as you may have an overall lower interest rate. If you plan to live in your home short term however, this may work against you as the overall effective interest rate including the points for a short term loan duration may in fact cost you more. Your mortgage banker is the professional who can work with you and give you the best advice for your specific situation as there are many variables when it comes to points and interest rates including your personal credit score, down payment and other terms.
Your home buying decision is one of the most important you can make. Not only is the home itself, location, age, and many other factors important but your mortgage is important too as you may be paying this for up to 30 years. This is why it is important to shop around for mortgages and speak with a professional banker about your interest rate, down payment, payment time frame, monthly payment, escrows and how paying points can impact your loan.
While this article is not intended to be inclusive of all of the information needed for you to make a mortgage decision, the best advice for you is to seek a trusted mortgage bank that you are comfortable with and get pre-approved before you begin your home search so you know what you can afford and then you will be in the best position to make an offer on your new home.
I hope you found this article helpful. If I can help you further, I would be honored to do so as you explore your home buying needs and walk you through the process of finding and buying your dream home!
Feel free to reach out to me anytime at 615-630-9732 and let's see if we can work together!
Have a great day!
Sandy Smith