If you are financing your Real Estate purchase, you have most likely come across the term points or discount points. In most cases, points and discount points refer to prepaid interest, with one point equal to one percent of your mortgage loan. Lenders may offer borrowers the opportunity to purchase points on their mortgage, meaning you would be paying up front to lower the interest rate of your loan.
Types of Points
According to Bankrate.com, mortgage points are the fees a borrower pays a mortgage lender in order to trim the interest rate on the loan. This is often referred to as “buying down the rate”. Each point the borrower buys costs 1% of the mortgage amount. So, one point on a $500,000 mortgage would cost $5,000. The interest rate reduction varies from lender to lender, but on average, each point lowers the rate by 0.25%. This point reduction would lower a mortgage rate of 4% to 3.75% for the life of the loan.
Mortgage origination points are an entirely different type of mortgage points. Origination points are fees paid to lenders to originate, review, and process your mortgage loan. Origination points do not reduce the interest rate of your loan. When shopping for a lender, it can be helpful to take origination points into consideration. Some lenders will allow borrowers to obtain a loan with very little or no closing costs or origination points. However, it is possible that they may compensate for that with higher interest rates or other fees.
Discount Points: Things to Consider
How long will you live in the house?
If you choose to purchase discount points on top of your down payment and closing costs, you will lower your monthly mortgage payment and you could save a lot of money, but to do so, you must stay in the home long enough to recoup the prepaid interest. If you sell the home after a few short years, refinance the mortgage, or pay it off, buying discount point could cause you to lose money.
Can You Afford to Purchase Points?
Keep in mind, you may have to provide a down payment and cover closing costs in order to secure a mortgage. Think about whether or not you truly can afford to purchase points upon closing.
Is it Better to Purchase Points or Provide a Larger Down Payment?
A larger down payment may get you a better interest rate than purchasing points because it will lower your Loan-to-Value ratio (LTV). The Loan-to-Value ratio compares the size of your mortgage to the value of the home. It is important to consider all the factors that can determine how long you plan to stay in the home, then figure out how long it would take for you to break even before buying mortgage points. Things to consider include the size and location of the property, and your current job situation.
Call Michele Harmon Team at 713-818-1330 for questions or more information. We would love to connect you with one of our preferred lenders! We get nothing except peace of mind if you use them, as we know they will take great care of you and they will help ensure a smooth transaction.