Home Loan Discount Points
When buying a home, you might come across the option to add points to your mortgage loan. But what does that point mean? Are discount points worth it?
What is a Discount Point?
A mortgage discount point occurs when you opt to get a lower interest rate on your loan. It, in turn, allows you to save money on your home purchase over time. But you would also have to spend extra on the home at the start. You have to decide to save money now or later.
Here’s an example to show how this works:
- First, you would opt to have a point, or two added to your home purchase. Each point is worth 1 percent of your mortgage loan total.
- You would then spend that certain percentage on your loan to get the point. If you were to but a $150,000 home, you would pay $1,500 on a single mortgage point.
- The money you are spending would go towards the interest on your mortgage. For the above example, the $1,500 would work not on the $150,000 principal, but whatever the expected value of interest on your home would be.
- As you pay off that interest, the rate would effectively decrease. The decline would vary based on how much interest you are paying off and the initially anticipated interest total on your loan.
This simple process is useful as it reduces your interest rate by a small bit. You might get the total down by one-eighth of a percentage point. It just depends on what you are doing with the loan.
There are many positives of paying discount points on your mortgage:
- You will pay less money each month on your loan because of the reduced interest rate.
- It should be easier for you to cover your payments as you will be less likely to struggle with paying off your loan.
- You may also improve upon your credit rating, what with you showing your general commitment to getting your home paid off.
But even with those positives, you should only buy mortgage points when you can pay more money in the closing process. You would have to spend 2 to 5 percent of your loan value in the closing process. Points would only add to the total that you would pay.
How Long Do You Plan to Stay in Your Home?
You should also only consider points if you plan on living in your house for an extended period. It includes getting points if you will live in that property for the next ten or twenty years or so forth.
Take a look at how mortgage points can work if you are interested in lower payments. It can save you $ 1,000’s over the 1,000’s of the loan. Good luck with your home purchase or refinance. Let us know if you chose to leverage discount points.
Understand Loan Points & Origination Fees
Should I Buy Down My Home Loan Interest Rate?
One thing that you can consider doing when buying a property is to use discount points. These are points that might provide you with a better overall deal on your property.
Discount points work in that you will pay interest upfront to get a lower interest rate on your property. However, remember, you pay for discount points at a purchase closing.
Lower Interest Rate
The primary consideration of discount points is that they might provide you with a lower interest rate on your property. That is, the total amount of interest you would pay over the next few years will decline with thousands of dollars at stake in some cases. But to get those discount points, you will have to pay off some of that interest.
You would have to pay all those thousands of dollars of interest right now if you wanted to get discount points. The best way to describe this is that you are essentially paying off the part that you would have spent on the property had you paid the home loan off sooner.
Think of it as a case where you are paying off a good portion of the home loan’s cost right now. Lenders like to know you are capable of paying off your property loan.
What Would You Do About Payments?
With discount points, it becomes easier for you to afford the monthly loan costs. Although you are spending more at the start, the monthly payments are cheaper, thanks to the lower interest rate.
But even with that, there is a potential that you might be able to pay off the home loan earlier. The early payoff could be worthwhile if you have enough money to utilize, but at the same time, you would not have benefitted all that much from the discount point at this juncture. You would be better off using discount points if you do not have any plans to pay off your loan early.
What About Negative Points?
One intriguing option entails getting negative points on your purchase. Negative energies go onto your loan in that you can get a higher mortgage interest rate on your property in exchange for something like all the closing costs associated with your property reduced or even eliminated.
It is an exciting choice for getting your property paid off, but you would have to watch how the monetary difference between the closing costs and the new interest rate goes into consideration. Although closing costs might go for around 5 percent of your home’s value in many instances, the potential is there for the added interest charges to be worth more than that total.
Be aware of what you are doing when getting discount points on your property regardless of whether they are positive or negative. Always compare your options and take a look at what you might spend on space and how you will pay for the property’s entire cost.