How Important Are Points To A Mortgage Rate?
By Bob RedtreeSeveral things affect a mortgage rate. The first question to ask is how much the mortgage rates are nationally. Another question is how big of a risk a borrower will be for a lender; the higher the risk of default on a loan, the more the lender will charge that particular person. Those two factors are not necessarily anything that the borrower can have an effect on immediately with their own actions, but with the purchase of points, they will be able to lower the mortgage rate.
How Discount Points Lower The Principle Balance
The type of points that anyone who wants lower their costs needs to concern themselves with are discount points; these are the points that will affect a mortgage rate. A discount point will lower the principle balance on a mortgage by 1.0%. This means that the borrower will need to pay 1.0% of the balance up front at the time he or she makes the down payment and any other fees.
How Discount Points Lower The Mortgage Rate
For example, a borrower who has a mortgage for $200,000 has the option to purchase each discount point at 1.0%. This will lower the amount of the principle by $2,000. It will also lower the borrower’s mortgage rate, but not by 1.0%. The mortgage rate will decrease by 1/4% to 1/8%. Paying several discount points will further decrease the mortgage rate that borrowers will need to pay at the same time as lowering the principle balance.
When It Is Worth It To Pay Points
It is important to pay points to lower a mortgage rate when people know they will be in their homes for at least seven years. If they know their stay will be shorter, it may not be worth it to pay this much money up front.
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- Should I Pay Points to Lower My Mortgage Interest Rate?
- Should I Pay Discount Points In Exchange For A Lower Interest Rate?
- Should I Pay Discount Points On My Mortgage?
- Are Mortgage Points A Good Investment?
- What Are Discount Points On A Mortgage Loan?