A home is a lot more than a structure held together by wood and nails. It is a part of the world stage that holds your stories, your memories and your milestones. We can all agree that purchasing a house is one of the biggest financial decisions that you will make in your life. When you’re spending that amount of money, you want to make sure that you’re getting a bang for your buck.
You’re all ready to sign the contract when you come to the paying points section. Should you or should you not pay down the rate? You may even be wonder, what does that even mean? Well let’s break it down:
What is a mortgage point? A mortgage point, which is also known as a discount point, is a type of fee that is paid to your lender at closing in order to receive a reduced interest rate. This is often referred to as “buying down the rate”.
One mortgage point costs about 1% of your total loan amount. In other words, on a $100,000 loan, one point would cost $1,000. This prepayment of interest, essentially, can save you thousands in the long run.
Mortgage points are a good idea if you are going to be in your home for a long period of time, which is often hard to gauge. If you buy mortgage points and move to another home in a couple years, then you’ve made a terrible decision.
These work like the positive points above, but in reverse. Instead of borrowers paying money to lower their interest rate, with negative points, the lender will pay you money to take a higher interest rate. This is usually a better idea for those who know they are only going to be in a home for a couple years. This is usually not given in cash or a check but is usually just applied to your closing costs.
Both positive and negative mortgage points can be useful in certain situations. It is important to take into consideration what the lender is offering and make a decision if it is work it for your long-term situation.