If you’re taking an online mortgage service from a good provider, you must be aware of mortgage points. No? Let’s look into it then.
What Do You Mean by Mortgage Points?
Mortgage points are popularly known as discount points. A borrower, or a homebuyer in this case, pays it to the lender in exchange of a reduced interest rate. It is also known as ‘buying down the rate’. Each mortgage point is typically equal to 1% of the total mortgage amount.
Also, each point reduced the interest rate on the mortgage up to 0.25%.
For example, if you have a mortgage of $100,000 with an interest rate of 3%, your monthly payment will be $421 per month. If you purchase three discount points, your interest rate would become 2.75%, and your monthly payment would decrease to $382 per month.
Thus, you can very well understand that buying mortgage points will save you significant money over the duration of your loan. If you purchase a mortgage from an online mortgage service, you are indirectly prepaying the interest in exchange for a smaller monthly payment.
There is also a second variety of mortgage points, known as origination points. These are the fees which are paid to the lenders for the evaluation, processing as well as approval of the loans.
Your interest rate will decrease by a certain percentage for as many discount points you buy. Many mortgage lenders set an upper maximum limit to the number of mortgages points a borrower can buy.
How Do They Benefit You?
You might wonder whether mortgage are worth it. Well, yes, it is. The mortgage points come with the following benefits:
- You will have to pay lower monthly payments.
- Long term savings are substantial if you buy mortgage .
- Discount points are also tax deductible.
Nevertheless, many of you may find it difficult to pay the down payment or the closing costs. You may not have enough money left with them to purchase mortgage points. It is better to use a mortgage calculator to budget the costs and plan accordingly.
You need to pay for mortgage at the time of closing. Your lender will make the required calculations and add the amount to the closing costs.
The Right Time to Buy Mortgage Points
If you want to stay in your home for a long time, it is always recommended to buy mortgage for lower interest rates. Long time refers to 10-15 years minimum. This helps in saving a lot of money.
If your credit scores do not allow you to get lower interest rates, you can opt for mortgage .
Find the breakeven point by dividing the upfront cost of the mortgage point by your monthly savings. If you find that you will be able to stay in the house for more than that time, buying mortgage points will be sensible.
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