Lots of people have this question when searching for home loans: what are points in relation to home loans?
If you have started to search for your first house, or simply talked with lenders about getting pre-approved for a mortgage, you may have come across the term “points.”
Unless you work in the real estate and mortgage industry, this is likely a term you’re not familiar with. Fortunately, points are actually pretty simple. They’re not right for everyone, but they could be your key to a more affordable mortgage loan.
And if you do your research, you may discover they are the right choice for your financial future. …
What are Points in Relation to Home Loans?
Points are essentially fees that are paid to the lender at the closing of a real estate loan transaction in exchange for a lower interest rate. This practice is often referred to as “buying down the rate.” The numbers will vary, but essentially you pay upfront for a lower interest rate down the road.
The advantage of points on a mortgage loan is that they can lower a monthly mortgage payment, making longer-term homeownership more affordable. In most cases, the longer you plan on owning the home, the more you can benefit from purchasing points.
As explained by Investopedia, mortgage points come in two varieties:
• Origination Points:
These are the points that are used to pay lenders and loan officers, compensating them for contribution to the mortgage process, which includes processing and evaluating mortgage loans.
• Discount Points:
Many people will wonder, “What are points in relation to home loans?” Usually they mean discount points. Essentially, this is prepaid interest or mortgage fees that home owners can buy to lower the total amount of interest they have to pay. For most lenders, each discount point costs 1% of the loan amount.
Are there Drawbacks to Purchasing Mortgage Points?
Generally, anyone who plans to sell the home within five years will likely want to avoid paying mortgage discount points. The benefit of buying these discounts is for the long term, so if you are looking at a short-term stay with a quick sale in a few years, then points may not be the right choice.
Discount points paid to lower the interest rate are tax deductible, but only for the year that you paid them. If you don’t purchase discount points, you will have a higher interest rate but you will also have a large potential for tax deductions, which can be a financial advantage.
What are Points in Relation to Home Loans? … (And More Information!)
Want more information about mortgages and home loan points? Contact Seth Wilcock today, and you’ll get reliable, honest advice for your real estate needs.