San Diego, CA (PRWEB) August 01, 2013
LoanLove.com is a borrower advice website that provides detailed insights into the mortgage industry in a fun and entertaining way. The team at LoanLove.com is devoted to help empower both first time and experienced homeowners with valuable resources, first-class knowledge and connections to top-rated industry professionals and has the mission of helping consumers and borrowers to obtain the latest information on mortgage lending trends, the real estate market and the U.S. financial landscape in order to help them obtain a home loan that they will love. A new article on the website helps to answer the question “What are mortgage points?”
The article explains: “Most times when buyers and mortgage pros talk about points, they’re talking about a percentage of the mortgage that you pay upfront in order to reduce your monthly payments. Usually, a single point is equal to one percent of the mortgage total (so, for a $300,000 mortgage, one point would be $3,000, two points would be $6,000, etc.). Here’s where it gets a little confusing: Just because you pay points upfront doesn’t mean the total amount of your mortgage will be reduced – in this example, your mortgage will still be $300,000. What it does mean is that your interest rate is slightly reduced for each point you pay.”
Traditionally, paying a single mortgage point reduces the interest rate by one-quarter of a percentage point. While that is a general rule of thumb, it can vary by lender and in the recent period of low rates, points tended to be worth less among many lenders – about one-eighth of a percentage point. So in essence, paying points is like paying a small portion of the mortgage interest in advance in order to reduce the monthly payment. There are also so called “negative-points”. These occur when a buyer decides to pay a slightly higher interest rate in exchange for a credit toward closing costs. Most buyers choose this option when they find closing costs a little too high to handle.
The disadvantage to negative points is that the higher rate can turn out to be much more costly over the life of the loan, and greatly outweigh the amount that would have been spent on the closing costs. The Loan Love article says: “Consider a $200,000 loan at 4.5%. Over a 30-year term, you’d end up paying $164,813.42 in interest. Now say you decide to take a credit toward your closing costs in exchange for an increase in the interest rate to 4.8%. At that rate, after 30 years you would have paid $177,759.06. That’s a difference of $12,945.64. Depending upon the credit you’re receiving and how difficult it would be for you to pay closing costs upfront, you may or may not consider that to be a good deal.”
Both points paid up front and negative points can make sense and help the homeowner save money depending on their situation. However each situation is different and there are a number of factors that should be taken into consideration in order to ensure that the homeowner is actually saving money and not taking on a bigger financial burden instead. For more information and to answer the question “Are mortgage loan points right for you?” please visit LoanLove.com for the full article.