The mortgage loan process can be difficult to understand because there are many components and a lot of money involved. You really can’t afford to make a mistake when securing a loan because it can end up costing you a lot more cash than you bargained for when you dreamed of owning a home.
Borrowers have options to help save money on a mortgage. You may have heard about points when discussing mortgage loans. Many people are confused about the topic but buying points can actually lower your interest rate throughout the course of your loan. Buying points isn’t realistic for everyone and you should weigh your options before making a decision.
What Are Mortgage Points?
Buying points on a mortgage means you are paying upfront a percentage of the loan at the time of closing. For those who choose to buy points, the interest rate of the loan is reduced. With the lowered rate, the amount of the monthly mortgage payment is less for the borrower. The more points you buy, the lower rates and payments become.
Points are based on the amount of the loan you are seeking and not the sales price of the home you are buying. For each point you purchase, it equals 1% of the loan amount. For instance, if the home you are looking to buy costs $300,000, the amount of each point would be $3000. For each point purchased, the interest rate will be reduced by a quarter of the percentage point in most scenarios. However, you should note that point amounts will be different amount lenders and be influenced by the bond market. Generally, consumers will pay for half of a point up to 4 or 5 points towards their mortgage.
Making a Decision
There must be a pro and con list devised to decide whether buying points makes sense for you. If you know you are going to be in your home for a long time, buying points makes sense because you will end up saving a lot of cash over the long haul. If you plan to sell or refinance in 2-3 years, buying points has no benefits for you.
Is It Affordable?
Your home purchase may be the biggest investment you make in your lifetime and new homebuyers will have a lot of other expenses to consider outside of mortgage points. From the initial down payment to the costs for moving, it may not be financial reasonable to put out more money towards point buying. You’ll need to tally how much your expenses for closing and moving will cost before making a decision to buy points upfront.