Mortgage loans are not just the sum of the interest and the loan amount. Instead, they often include mortgage points. Even if you get a loan without points, points will have affected the price you pay.
So what exactly are mortgage points? Its the fee that you pay as part of your mortgage loan. One point is equal to one percent of the loan amount. When lenders charge points on a mortgage, it increases the fees you end up paying.
When lenders advertise rates, the rates often include points. That is why it is important to shop around for a loan. Different point combinations will create different fees and monthly payments. So before making a final decision on a loan, be sure to look over all the details and not just the interest rate.
Here is an example. But remember the equation: Loan amount x .01= point amount.
If you are taking out a loan for $125,000, your point amount would be $125,000 x .01 or $1,250
Kinds Of Points
Discount points helps you discount your interest rate by paying up front. The more you pay upfront, the lower your interest rate will be. However, the opposite is true. If you prefer not to pay points, them you can expect your lender to increase your interest rate accordingly. FYI: when it comes time to do your taxes, discount points are tax deductible.
Origination fees are points that lenders charge to help them recover the cost of creating the loan for you and pay their brokers. Not all lenders use origination points. Those that do, are often willing to negotiate the fee. Origination fees are typically not tax deductible, but talk with your tax accountant about this before filing your taxes.
Should you Pay For Points?
How do you determine whether you should pay for points and how many points you should pay? That depends on two factors: How long do you plan to live in your home and how much money do you have for closing costs?
If you plan on living in your home a long time, then you will get better savings by purchasing discount points. Of course, paying for points can only happen if you can afford them. For many people, having enough money for the closing costs and down payment take everything they have.
Finding The Best Rate-Point Combination
It will be up to you to determine which combination works best for you. If you don't have alot of money on hand, then finding a loan with few points is going to be right for you. If, on the other hand, your income is on the borderline, finding the lowest possible rate so that your mortgage payment doesn't seem excessive to your income is the way to go.
No one can determine for you what is best. However, understanding points and their function will help you find the mortgage that will work for you.
Lisa Longest, a trusted real estate professional with over 13 years experience, specializing in listing and selling residential homes on both sides of the Chesapeake Bay Bridge, in Anne Arundel and Queen Anne county, from luxury homes to more modest dwellings. Lisa is an active member at MidShore Board of Realtors®
You can reach Lisa best on her cell phone at 443-786-4200, or via email LisaLongest@EXITGoldRealty.com. EXIT GOLD REALTY is located at 115 Pullmans Crossing Road, Grasonville, MD 21638. The broker, Debbie Houck, can be reached at the office under 410-304-2115.