After you have
been pre-approved for a mortgage to buy your new home, you may hear something
about“points.”
This simply
means you have the opportunity to pay to decrease your mortgage payments and/or
save money on interest.
A point is
equivalent to one percent of your total mortgage. For example, if your loan is
$100,000, one point would be $1,000 or one percent of the loan amount.
The primary
types of points are (a) origination points or (b) discount points.
Origination points
When a mortgage
broker processes your loan, you and the lender are required to pay for his or
her service. This payment is called an origination fee, which is a percentage
of total mortgage loan.
Beware that
mortgage brokers can decide on their fee amounts, and some will charge you excessive
amounts. If you’re not paying attention, don’t know better and don’t have a
good buyer’s agent or real estate attorney representing you, you may not know
you’re paying too much.
If you are
being charged two (2) points on a $200,000 loan, it means you will pay $4,000 (2%
of $200,000) when you are closing your loan. While that may not seem
ridiculous, it’s best to do some careful to research to find out if the broker
also is not getting a Yield Spread Premium or back-end points, too.
Mortgage
brokers do this by adding a prepayment penalty to your loan, which means if you
pay the loan off early, the lender or bank penalizes you
by adding on a higher interest rate to cover their brokerage fees.
Although the
closing agent will discuss these fees with you at the closing and it will be
included in your paperwork, you may miss the significance of them if you don’t
understand what they mean to you.
Here’s how it
works:
A broker could
offer you an interest rate of 5 percent and not get anything from the lender.
The broker may also offer a 5.4 percent interest rate and get one percent of
the total amount of the mortgage from the bank or lender. Another possibility
is the mortgage broker could offer you an even higher interest rate and get
three percent back from the lender.
Be sure you ask
the broker the amount of his or her total commission. That way, you will be
fully aware of what your costs will be and be able to negotiate, decreasing
your costs and lowering your interest rate to save thousands in the long run.
Discount points
These points
are paid at the closing table and will help you get a better interest rate for
the duration of your mortgage.
If you plan to
stay in your new home and keep your loan for a long time, say 15 or 20 years,
paying discount makes may good a route to take.
Your lender may
offer you the opportunity to pay one percent of the loan (one point) to
decrease your interest rate by an eighth of one percent. But this option would
not make as much sense if you know you are going to refinance or sell your home
in a short period of time.
The best way to
decide if buying discount points is a good option for you is to determine your
break-even point. The general rule of thumb is the longer you plan to be in
your home, the chances are better that this may be beneficial for you. So
crunch the numbers.
For instance,
if your loan will be $200,000 and your interest rate is 5.000%, your loan
payment, including principal and interest would be $1,073. But if you purchased
one discount point, your interest rate would drop to 4.875% and your monthly
payment would then decrease to $1,058. Then you would save $15 a month…in
exchange for paying and additional point (one percent of the loan for $2,000 in
this example) at closing.
It would cost you $2,000 for that one discount
point at the closing. With the $15 a month savings, you would break even in 11
years. Since most families remain in their homes for less than a decade, in
this case buying discount points probably would not be a good decision. But it
could be a solid choice if you know you’ll say in your home longer.
Call Conquest Real Estate Group for More Info: (248) 569-1486
