When individuals decide to shop for a mortgage, they may not be aware that they can lower their interest rate through various methods, including discount points.
Lowering the amount of interest paid on a loan is certainly ideal. Discount points can accomplish that, but there are other considerations. Below, we break down discount points and their practical application toward your investment.
What are mortgage points?
Mortgage points are fees paid to a lender in exchange for a lower mortgage interest rate. Each point generally costs 1 percent of the mortgage and can save you money in the long run by making an up-front investment.
How do they work?
When you turn to mortgage points, you are buying down the rate of the loan. In effect, this lowers the monthly mortgage through reduced interest owed for the life of the loan. Generally, points work better over the long-term because the savings are accumulative.
What are negative points?
Negative points work in reverse as well. A homebuyer can pay less in closing costs if they're willing to pay a higher interest rate. One negative point, which generally equals ¼ of a percent (interest rate), would result in a 1 percent credit toward closing costs.
Will I break even?
As you decide to take on mortgage points, it's important to understand when you'll be able to recoup your initial costs. The break-even point is calculated by dividing the cost of the points by how much you save on your monthly payment.
Mortgage points can be beneficial to anyone. Whether you're buying your first home or refinancing your current loan, discount points allow you the financial flexibility to pay less interest and earn savings each month.
If you're thinking about staying in your new home for the long haul and you have some wiggle room for closing costs, then discount points are certainly financially beneficial.
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