What Are Mortgage Points

What Are Mortgage Points?
Many people have heard of​ the​ word points or​ have heard of​ the​ term,​ paying points,​ as​ it​ applies to​ buying a​ home .​
Some consumers,​ however,​ are not sure what that word or​ term means,​ and this is​ unfortunate because the​ subject is​ important .​
This article examines the​ basics behind the​ point system in​ home buyer.
When you​ buy a​ home,​ you​ must often pay points .​
Paying points is​ a​ method of​ paying interest in​ one lump sum,​ up front,​ in​ order to​ get a​ lower interest rate on​ a​ fixed rate mortgage .​
It is​ easy to​ calculate the​ value of​ a​ singe point .​
One point is​ equal to​ 1% of​ the​ mortgage amount .​
It is​ easy to​ see that the​ more points you​ pay,​ the​ lower your mortgage rate will be.
An example might be: a​ 30-year,​ $150,​000 mortgage might have a​ rate of​ 6.7%,​ but come with a​ charge of​ 1 point,​ or​ $1,​500 .​
To pay this point,​ you​ would have to​ pay the​ $1,​500.
A lender can charge 1,​ 2 or​ more points .​
There are two kinds of​ points: Discount points and origination points.
Discount points: These types of​ points are truly prepaid interest on​ the​ mortgage loan .​
The more points you​ pay,​ the​ lower the​ interest rate on​ the​ loan .​
It also goes that the​ fewer points you​ pay,​ the​ higher the​ interest rate will be .​
Home buyers will normally try to​ pay anywhere from 0 to​ 4 points,​ depending on​ how much cash they have on​ hand and how much they want to​ lower their interest rates .​
This type of​ point is​ currently tax-deductible.
Origination Points: This is​ also known as​ an​ origination fee with some lenders .​
It is​ charged by the​ lender to​ pay for the​ costs of​ making the​ loan .​
The origination point (or fee) is​ deductible only if​ it​ was used to​ get the​ mortgage and not to​ pay other closing costs .​
For the​ most current rules on​ this you​ should check with your lender,​ attorney,​ or​ the​ IRS.
When deciding how many discount points to​ pay,​ home buyers should consider the​ following .​
Keep in​ mind that the​ more points you​ can pay now,​ the​ lower your monthly payment will be .​
Here are some issues to​ consider:
How much cash can you​ spend on​ points,​ and do you​ have this cash on​ hand?
How long do you​ expect to​ have the​ home or​ the​ mortgage? the​ key here is​ that the​ longer you​ intend to​ have the​ mortgage or​ the​ home,​ the​ more sense it​ makes to​ pay as​ many points as​ possible up front.
If you​ intend to​ keep the​ home for a​ long period of​ time,​ it​ may be worth reducing the​ interest rate by paying more points .​
On the​ other hand,​ if​ you​ require the​ lowest possible closing costs,​ choosing a​ 0 point or​ slightly higher point value may be your best option.
You can find online calculators that can help you​ see the​ differences that points can make with any particular loan .​
You simply input the​ information that you​ have such as​ the​ amount of​ the​ loan,​ the​ length of​ the​ loan,​ interest rate,​ and points paid and the​ calculator will show you​ the​ results .​
This is​ a​ good way to​ get fast information on​ points and how they can affect your loan in​ the​ long run.

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