howtorealestatelikeaboss.com Mortgage points can be a confusing topic, especially if you’re not familiar with them. And while they are hefty in value, the information surrounding them is often overwhelming. So, let’s start with the most basic point (pun intended): What, exactly, are mortgage points, and why do I need to know about them?
Here’s a quick and simple guide to understanding the “what” and “why” of mortgage points:
What are mortgage points?
When your lender brings up mortgage points, it’s best to think of them as discount points. These are typically points, calculated to roughly 1% of your final mortgage, that can be applied to your mortgage interest to bring the overall interest rate down throughout the life of your mortgage loan.
How do mortgage points work?
Mortgage interest rates are typically calculated into your monthly mortgage payment. With mortgage points, you can bring your overall monthly payment down by paying into your interest rates ahead of time.
So, if you have a mortgage of $200,000 with interest rates already calculated in, paying $2,000 up front would grant you a mortgage point, being that it is 1% of your overall mortgage balance.
Why do I need to know about mortgage points?
While it may seem easier to simply pay your monthly payments, and for some it’s the ideal choice, you may need to consider mortgage points if you’re searching within a market with slightly higher interest rates.
Likewise, if you’re planning to stay in your home long enough to watch your prepaid interest pay off in the long term, mortgage points may also be worth investing in.
Mortgage points can raise your overall closing costs by a significant amount. However, based on your unique circumstances, the bulk closing costs may be an option to consider if you’re interested in decreasing your monthly payments for the overall life of the loan.
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