Understanding Mortgage Points: What to Know & How They Work
When it comes to buying a residential property, seeking funding is the most important route to take. This is where a mortgage comes into the picture. However, there are a handful of factors to consider in ensuring that you get the right lender and the best deal for a home loan. For the most part, you’ll factor in the down payment, interest rate, and monthly contractual payment (MCP).
However, have you ever heard about mortgage points in the real estate world? This opportunity may not instantly present itself, but this is a great way to secure the best possible interest rate. As you may or may not be aware, buying mortgage points can reduce your interest rate and MCP.
In this article, we’ll cover what you need to know about mortgage points, how they work, and whether they are worth buying.
Mortgage points in a nutshell
First, what is buying mortgage points? For the uninitiated, they are fees directly paid to the lender at the time of closing to reduce your interest rate for the life of the loan. Also known as discount points, they are the best form of prepaid interest when finalizing your mortgage. Likewise, buying these points will help lower your MCP and interest rate in the long run.
How mortgage points work
Taking advantage of mortgage points is a straightforward process. You will initially discuss your options with a prospective lender. Then, depending on your income, debt, and credit score, you and your lender will arrive at the best possible home loan plan.
Understand that some lenders may bring up the option to buy mortgage points to reduce your interest rate. If you have extra funds to spare, you may want to take advantage of this opportunity. If the lender hasn’t brought this up, however, you can ask to see if buying discount points is a viable option. If both parties agree, then you’ll have to pay the fee upfront as part of your closing cost and expect a lower interest rate in the long run.
In essence, the act of buying points is a way of asking your lender to “discount” the interest rate. One mortgage point is usually equivalent to one percent of the loan amount. For the most part, it can reduce your loan’s interest by about one-eighth to one-quarter of a percent, meaning that you won’t have a hard time paying your MCP until the loan’s maturity date.
Other vital considerations
Now, let’s delve into a few considerations that have to do with mortgage points. Take note of the following:
- The difference from origination points: Some home buyers tend to confuse mortgage with origination points. Understand that discount points have nothing to do with the latter. Origination points are fees paid to the lender for restructuring and processing your loan application, which is why they have nothing to do with reducing your interest rate.
- Assessing discount points: Buying mortgage points is an excellent opportunity to take. However, be sure that you have enough funding to pay for the fees apart from your down payment and other closing costs. Ultimately, you have to assess if it’s the right option for you.
- Negotiating for mortgage points: While some lenders inform you that discount points are non-negotiable, the truth is you can actually negotiate. Doing so will impact your mortgage payment and lead to potential savings over the life of your loan.
At this point, you now know what mortgage points entail and how they work. At the same time, be sure to consider all the valuable information discussed above when planning to buy discount points. Ultimately, doing so will reduce your interest rate and help you get by with your mortgage payments in the long run!
Is it worth it to buy mortgage points? Let our loan experts assist you! We help clients find the right mortgages in Colorado, whether purchasing a new property or refinancing a loan. What are you waiting for? Obtain mortgage rates and apply now by scheduling an appointment!