You often hear mortgage companies and real estate agents discuss “Mortgage Points,” but what are they?
You may hear your mortgage lender utter the words “mortgage points” a few times while going over your loan. You merely nod pretending to know what they are in an effort not to appear dumb. This is a bad strategy when considering something as important as your mortgage–a contract that will be with you for 30-odd years. So, when trying to find out how much your mortgage will cost, what do these points mean and can you use them to your advantage?
What is a “point”?
A point is a fee that is equal to 1 percent of the loan amount. A 30-year, $150,000 mortgage might have a rate of 7 percent but come with a charge of 1 point (or $1,500). A lender may also charge 1, 2, or even more points. These points come split into two branches: discount and origination points.
Discount Points. These points translate to prepaid interest on the loan. The more points you pay, the lower your interest rate will be, and vice versa. You can pay anywhere from 0 to 4 points, depending on how much you want to lower your rates.
Origination Points. These are points charged by the lender to cover the costs of making the loan. Like a service fee when you buy event tickets: you don’t understand why, and there’s not much you can do about it. Luckily, these are tax deductible if you use them for mortgage purposes and not for any other closing costs.
These knowledge points you just earned will help you when it comes to the mortgage points you will inevitably come across. Contact Dean Rathbun when it comes time to finding the perfect plan of action to buy your home. We are happy to help you.