What are mortgage points?
Mortgage Loans points defined in laymans terms; Points in the mortgage loan industry can be explained easier as having a dual definition.
Let’s first explain it from an interest rate prospective. One point is equal to 1/8 of a percent. The difference from a 5% interest rate and a 4.75% interest rate is 1/4% or written as a 2 point spread (difference). A borrower who only qualifies for a rate of 5% but would like to have a smaller monthly payment can buy discount points. So buying 2 points would give them the 4.75% interest rate reducing their monthly payment.
The second part of the term point or points is the dollar value of a point. Let’s stay focused on the dollar amount of the loan. The cost or value of each point is a percentage of the total amount of the loan. 1% of a $200,000 loan amount is $2,000, so if the borrower wanted to reduce their interest rate from 5% down to 4.75% they would pay the value of two points, in this case the value or cost of two points on a $200,000 loan would be $4,000.
Points should always be a choice for the borrower and never an excuse for a bank representative or mortgage loan originator to make more money.
A borrower should always know the break-even point on a loan for the point to be effective. Example; the break-even point for cost of the 2 points on a $200,000 for a 30 year fixed rate mortgage loan may be at the seven year time frame in the loan. If the borrower pays off the mortgage loan by either selling the property or refinancing the borrower will lose money. If the borrower keeps the mortgage loan beyond the break-even point they will be saving money on the total amount of interested paid during the life of the mortgage loan
On a more complex side, with good strategies and the proper combined use of points, origination fees and adjusted origination charges a borrower can have addition options they can use to adjust their monthly payments or have a lender credit issued to reduce the amount of funds needed for closing.
The Solutions First Mortgage Team believes that a well educated borrower given the right options can choose the best mortgage loan program for their needs.
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