Mortgage Points: Prepaid Interest

When shopping for a new home, most home buyers will also be looking for the best interest rate and loan terms on a mortgage. The rate that is quoted by the lender or mortgage broker is seldom a straight percentage rate. Usually, it will be a combination of an interest rate and mortgage points. Paying points at the onset of a mortgage buys down the interest rate, which results in a reduction of the long-term interest expense on the loan. Typically, points are equal to 1% of the loan amount. For example, on a $300,000 loan, the borrower would pay $3000 per point to the lender.

Choosing To Pay Points

Whether more points and a lower rate or fewer points and a higher rate is the best choice really depends on the borrower’s personal situation. The borrower must decide whether they can afford the upfront points payment and also take into consideration how long they expect to keep the new home.  If a borrower is short on cash for their new house purchase and doesn’t plan on keeping the property for more than a few years, then paying points many not be the best way to go. The longer the borrower plans to stay keep the home, the more it makes sense to pay points and by down the interest rate because the benefit is long term.

It can get confusing with the different combinations of rates and points available from lenders. For example, a 7% loan with 3 points and a 7.5% loan with no points are comparable. Yet, one choice over the other will be best, again depending on how much the borrower can afford upfront and how long he or she plans to keep the new house and mortgage.

For example, a borrower that pays 3 points for a 7% rate on a $1000, 30 year mortgage, the (principal and interest payments) would be about $408 per year lower than if they would have chosen a 7.5% interest rate with no points. However, the borrower would have to own the home for at least 7 years for the savings to pay back the initial $3000 expense for paying points.

Note: One major selling feature that lenders will use with borrowers is that any points paid on a first mortgage are fully tax deductible for that year.  

Mortgage Points Calculator

Borrowers can run the numbers on an online mortgage calculator in order to compare options, like the one at interest.com. The calculator will show the costs and benefits of paying points to reduce the rate on an fixed-rate mortgage, and the least amount of time the borrower must hold a fixed-rate mortgage before it makes sense to pay points, which is referred to as the break-even period.  

When seeking a mortgage to purchase a new home, borrowers must choose from various loan options based on their current financial situation and long term goals. For more information on mortgages, visit the experts at New Homes Central Lending.

[tag]mortgage points, mortgages, paying points, pay points, home loans, mortgage loans, new home mortgage, new house mortgage, new house, new home[/tag]

If you're new here, you may want to subscribe to our RSS feed.

You may also Subscribe to New Homes Real Estate Listings For Sale by Email Thanks for visiting!