Get to Know What Mortgage Points are and How they Work
The mortgage points are also known as discount points. They are actually fees which are paid directly to the lender at closing in order to get a reduced interest rate. This is actually the buying down the rate that can definitely lower those mortgage payments every month.
Know that a point actually costs one percent of the mortgage amount or this is $1,000 per $100,000. It is very important that you are going to pay some interests up front so that you can have a lower interest rate over the term of your loan. If you are thinking about owning the home a lot longer, then there can surely be more points which will definitely help you save on the loan’s interest.
It is quite important that you would consider how long it can actually take you to recoup the cost of such buying points. Such would be known as the break-even period. So that you will be able to know this, you have to divide the cost of the points by how much you will save on the monthly payment. Such resulting number is going to be the length of time that it would take for the monthly payment savings to level or equal the cost of your points.
When talking of those mortgage points, there are a few things that you need to understand. The terms on the buying points may differ greatly from each lender. Know that these are certainly the points that you have to take into account. Know that the interest rate reduction which you get for purchasing points isn’t set and this would depend on the lender as well as the marketplace.
The buying points may give you a tax benefit. You need to call the tax professional for you to know if what you do can affect such tax situation.
Understand that the points for the ARMs or the adjustable-rate mortgages would typically offer a discount on the interest rate of the loan only on the initial fixed-rate period. Make sure that you run the numbers for you to ensure that the breakeven point covers very well prior to the expiration of the fixed-rate period.
So that you can know if the points are great for you, then make sure that you are able to ensure that you have the cash to buy mortgage points upfront other than the closing costs, the down payment as well as the reserves. You should also think about the length of time that you are planning to own such home.
Buying points for you to be able to reduce the rate can make sense when you would choose the fixed-rate mortgage and you plan to own the home after you have reached the breakeven period. On certain circumstances, purchasing mortgage points if you would buy a home may save you a great amount of money over the term of the loan.