Even before you begin shopping for a home, you will probably find yourself shopping for a mortgage. You know to compare interest rates and terms, but may not know it can be just as important to inquire about mortgage loan points.
Mortgage points are a fee you as the borrower may be required — or may opt — to pay your lender at the time your loan closes. It’s important to know how they work because the interest rate you are quoted may be dependent on paying points for the mortgage. So, finding out if home loan points are included in your loan is imperative if you are going to make an apples-to-apples comparison of loans from different lenders. Learn how paying points on your mortgage loan can alter monthly payments and help you save money in the long run.
You can’t benefit from what you don’t know: Understand mortgage loan points before calling lenders.
Here’s what you need to know to start an educated conversation with lenders about mortgage points:
- Home loan points are tied directly to the interest rate that you pay on your loan. Your mortgage points can often be reduced in exchange for a higher interest rate, or conversely can be paid to lower your interest rate. It’s a choice between paying money now and paying money later.
- Paying one mortgage loan point generally equates to reducing your interest rate by a quarter of a percentage point. So, if you pay one point, and your original interest rate was 6.75%, your adjusted interest rate would be 6.50%.
- To pay a mortgage point, you will be charged 1% of the cost of your loan. For example, on a $150,000 home loan, one point will cost $1,500 and two points would costs $3,000.
- Whether or not paying points is financially advantageous is dependent on the number of years you plan to stay in your home. A mortgage loan points calculator can help you decide if paying points will be a smart move in your scenario.
- In some cases it may be more valuable to apply money to your down payment in lieu of paying mortgage points. Your mortgage lender can help you make this determination.
Here’s what you should do before you sign a mortgage contract.
If you have any mortgage questions about how mortgage points work or how they will impact your total mortgage costs, don’t hesitate to ask your mortgage lender to break the costs down for you. It can be very helpful to see the full cost of home loan points and to have your lender show you how your monthly payments will be impacted by paying points. It is also a good idea to ask if there will be a greater benefit if you choose to apply money to your down payment instead of paying mortgage points. Each scenario will affect your loan costs differently. By investing some time up front, you can save yourself money in the long run and make educated decisions when it comes time to sign your mortgage contract.
