Foreclosure Bailout Lenders

Unless you have been in the mortgage market for a while, you may not be sure about the concept of discount points. It is a simple enough concept: in order to reduce the interest on your loan, you pay your bank some cash upfront as an incentive to lower the rate. Points will lower your total interest rate, and therefore the monthly payment on your loan.

One point equals 1% of the loan, and it is paid to the lender at the loan closing. If you are obtaining a $200,000 loan, one point would be $2,000 at closing. A borrower has the option of paying one or more points on the mortgage.

Your home loan rate is calculated primarily by your credit worthiness, but whatever the rate on the loan, paying points will make it lower. For example, if your original rate quote is 6%, according to your credit score, ask how much it will be if you are willing to pay any points. Each bank has its own way of figuring this, but they fall within the same scope, and the norm is that 1 point lowers a fixed rate mortgage by .25% and an adjustable rate loan by .375%. In discussing our example of a $200,000 mortgage, above, let’s say we want one point, that is, to get the loan rate reduced to 5.75% of 5.635%, depending on whether it is fixed or floating.

Most loan rates are automatically offered with the point quote. In other words, the quote may be 6%, 5.75% (1 point), 5.5% (2 points), etc. Then the quote would show 7% with the relevant reductions. So it is important to realize what the rate you will pay without points is to be able to find the rate you will have with points.

The monthly mortgage payment is lowered with each lowering of the rate; clearly a mortgage with a rate of 5.75% is going to be less than a loan with a 6% rate. Lowering the rate in this way is because you are actually paying some of your interest ahead of time. This means that if you do not have that mortgage for a long time, you will have prepaid this interest for no reason. You have to spread the cost of the points over the time you plan on living in the house.

Points are often used as a sales gimic, since homeowners will have a lower payment and will pay more for a home. For this reason, sellers frequently offer to give points as a sales pitch. But this doesn’t change the original calculations, because the price of the home will reflect the seller’s contribution.

There is no obligation on the part of the buyer to pay points. It’s a decision that a buyer can examine depending on all of the other factors in the loan.