Are you a home owner who is in the process of paying off a mortgage? If so you may be wondering what exactly discount points are on your mortgage loan.
This article will give information about the different types of points and will particularly look at discount points. This will allow you to make better financial decisions and may ultimately save you money in the long run.
Many people fear getting into a mortgage that they can’t afford and should seek expert financial advice before deciding whether to purchase discount points.
The simple answer is that discount points allow borrowers to lower the amount of interest they will have to pay on future payments. This is done by making a pre-payment on the interest or mortgage fees.
If a borrower unexpectedly comes into some money they may like to take the opportunity to purchase discount points in order to reduce their interest.
A discount point is usually worth 1% of the total mortgage loan. Depending on the mortgage amount and the borrower, each discount point will lower the interest rate by about one eighth to one one quarter of the interest rate.
Origination points are a fee that borrowers pay to lenders. This is as payment for services such as evaluating, processing and approving the mortgage loan.
An Example: If you have a $200,000 mortgage loan then each point will cost 1%, which is $2,000. If the interest rate on the loan is 5% then each point purchased would lower the interest rate by 0.25%. It is possible to buy, more than one discount point at a time. For the above example 2 points would cost $4,000. This would result in an interest rate reduction of 0.50, meaning you would only pay 4.50% interest.
Benefits of Discount Points
If you are trying to decide whether or not to purchase discount points then you will need to take two factors into consideration. These are the costs of the discount points and the amount of time you plan to stay in the house.
Consider your options carefully before making any decisions.
There are many benefits of discount points for both the lenders and the borrowers. Obviously the most important benefit for the borrower would be that they receive lowered interest payments in the future. This is only of benefit to the borrower however, if they plan on holding onto the property and mortgage long enough to save money that the lowered interest would provide.
For example, if you purchased points that cost $4000 which you paid up front, it could take up to sixty four months to earn this money back. It’s therefore only worth buying the discount points if you know you will definitely keep your property that long.
Another advantage of buying discount points is that they are tax deductible for the year they are paid in.
Benefits to Lenders
Lenders will also benefit from discount points as they will receive cash upfront rather than having to wait for money. This also helps to enhance the lenders liquidity situation.
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