When you’re looking for a mortgage for that home you’ve always wanted, some of the terms bandied about with the lenders you talk to can be a bit confusing. Terms like amortization, closing disclosure or appraisal fee may seem to be somewhat foreign concepts, especially to first-time borrowers.
Points fit into that same category. Many may have heard the term in connection with mortgages. But they may not know exactly what they mean or how they are calculated. This blog will help you grasp the concept better.
Depending on the lender, points can mean different things. For the sake of clarity, the concept of points that we’ll discuss here refer to credits a borrower can pay in exchange for a lower interest rate. In other words, you pay a certain amount of points up front in exchange for a lower interest rate and, therefore, lower monthly payments. This is a good situation for those who know they are going to be paying on a loan for a longer period, such as a 30-year mortgage.
How points are calculated
Each point is generally 1 percent of the loan value. For example, if a borrower is applying for a $300,000 loan, one point would be $3,000. And points don’t have to be a nice, even number. You can pay 2.75 points or just about any fraction of a point. Paying points lowers your interest rate when compared to a zero-point loan, that is, if it’s the same type of loan from the same lender. It’s only comparable if the same lender offers you the same exact terms and type of loan. The zero-point loan will have less in closing costs and a higher interest rate that the same type of loan from the same lender (same terms) that allows a borrower to pay points.
The interest rate discount that comes with paid points depends on several factors: the overall market, the lender and the kind of loan. For instance, the discount may not be the same if a borrower were to look into a conventional mortgage as opposed to an FHA loan. And each lender has their own pricing structure (Better Lending’s structure is as competitive as anyone’s).
It’s also important to note that if a borrower talks to one lender who offers a zero-point loan and another offers, say, a one-point loan, the interest rates could be the same. As stated earlier, each lender has a different pricing structure.
Borrowers are allowed to have Private Mortgage Insurance (PMI) removed from a home loan in two ways, automatically or by request.
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