When shopping for a mortgage, it's critical to have a general understanding of how points affect your mortgage rate and payments, and ultimately connect to your bottom line. Here are some guides to help you identify your net tangible benefit on a home loan.
When you pay points, you are paying a premium to buy the interest-rate down, thus lowering your monthly mortgage payment. In most mortgage scenarios, you have the choice to pay this point based on the interest rate, and other times you might not due to factors such as the loan-to-value ratio, loan size, loan program, loan purpose, property occupancy, or credit score. (You can see where your credit score stands by viewing your free credit report summary, updated each month, on Credit.com.)
A point is essentially 1% of the loan amount. Also referred to as mortgage pricing, points can change daily until you lock in your loan rate. Some lenders allow you to lock your rate upfront while others require your loan to be underwritten or have the home appraisal ordered prior.
This is the most common scenario for buyers, but your financial goals should dictate your decision. If lower interest rates over the life of the loan is better for your situation, paying points might be worth considering.
Basis point credits
When a particular interest rate generates an overage, a premium is paid back to you and applied toward closing costs. Here's how it works.
Let's say you're looking at that 30-year fixed rate at 3.75%, but you want no points. The next day mortgage pricing deteriorates by 25 basis points, making the rate 3.75% at 0.25% charge. If the 3.75% rate improves by 0.25% then that would be a credit as a function of your loan amount to pay the closing costs.
Mortgage tip: Anytime you're seeing a mortgage rate with any form of credit, it is based on the rate chosen for a specific day in real time. Always review APR as the benchmark cost measure.
Determine rates & fees consistent with your financial goals
- How long will you keep the loan or property?
- Do you plan to buy another property?
- Is retirement around the corner?
- Do you intend to pay the mortgage off in full?
- Do you want to pay dollars today to line up the future?
- Are the figures available based on your financial pictures consistent with any other goals you may have?
If you are uncertain about your short- and long-term financials goals, taking a conservative, low-cost, low-payment loan is usually a sound bet. An experienced mortgage professional can help you weigh costs versus benefits to determine which rate and pricing scenario best suits you.
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