Unless someone works in the real estate or mortgage industry, there is a high likelihood that they are going to run into unfamiliar terms. Appraisals, underwriting, and private mortgage insurance are a few of the examples. One of the most common terms that people might run into is termed mortgage points. Even though the term “points” might sound positive, this is not always the case. What do people need to know about mortgage points?
Mortgage Points Refer To Payments Due At Signing
When someone is negotiating for a home loan, they want to get the lowest interest rate possible. There are several ways that potential homeowners can get the interest rate reduced on their home loan. One option might be to increase the down payment. Another option might be to pay a percentage of the loan amount at signing.
Usually, mortgage points refer to a certain percentage of the loan amount that is due at signing. For example, someone who is being charged one mortgage point will pay 1 percent of the loan amount at signing. Why would someone want to pay a percentage of their loan early?
Mortgage Points Are Usually Paid In Exchange For A Lower Interest Rate
The most common reason why someone might pay mortgage points upfront is that they can bargain for a lower interest rate. For example, someone might be able to pay one mortgage point in exchange for having the interest rate on the rest of the loan dropped by 0.25 percent. Therefore, points go both ways. It is nice that someone can pay mortgage points to have the interest rate lowered on their loan; however, is this the correct decision?
Borrowers Have To Do Some Math
Ultimately, this comes down to a math equation. If a potential homeowner is forking over more money at signing, they are not going to be able to earn interest on that money in their bank account or the stock market. On the other hand, they will save money over the life of the loan because the interest rate will be reduced. Therefore, homeowners have to do some math and compare the interest they are losing by paying money upfront compared to the interest they are saving on the home loan.
About the Author:Babak Moghaddam graduated from University of Southern California in 1985. He entered the mortgage industry as a compliance auditor at the Bank of New York in 1986 and completed his masters in Business Administration two years later. After seventeen years in the traditional mortgage banking world Babak finally transformed this vision into his own practice in 2002 when he formed Charter Pacific Lending Corp, a mortgage company that has provided over $900 Million in residential real estate loans throughout Southern California. Babak and his team do things a little differently than other mortgage providers. They work as financial advisors, because they have come to realize that a mortgage is a very powerful financial tool. And just like any other financial tool, it should be managed as part of the overall financial management plan to reach every home owner’s long and short-term financial goals much faster. You can contact Babak for a free consultation and strategy session at (800) 322-1217 X103.