Best Life Insurance Quote Canada: Have You Been Offered Discount Points for Your Mortgage?
Posted by: Guest Author / Category: MortgageUnless you have been in the mortgage market for some time, you may not understand the concept of discount points. The basic explanation of paying discount points is that you are paying some of your interest to the bank in the beginning in order to lower your mortgage payments later on, during the course of the mortgage. Obviously, a lower rate will mean a lower monthly payment.
When lenders speak of a point, they mean 1% of the total loan. If you are obtaining a $200,000 loan, one point would be $2,000 at closing. You can pay more than one point and lower your loan rate even more.
As anyone who has been shopping for a loan knows, the credit rating determines the loan rate, and then the point reduction is taken off this rate. A buyer who was quoted 6% based on his credit rating, will receive a series of other quotes based on points. There is no set amount, but most lenders will lower a fixed rate mortgage by .25% and an adjustable rate mortgage by .375% for each point paid. If we use the $200,000 mortgage in the above paragraph, and we pay one point, we can reduce the rate to 5.75% on a fixed rate and 5.625% on an adjustable rate loan.
Most banks will quote mortgage interest rates with optional points alongside. For example, the bank may list the rate as 6%, no points, 5.75%, one point, 5.5%, two points, etc. Then the table would show 7% with the pertinent reductions. This is what makes it important that a borrower know what the point system represents.
The monthly loan payment is lowered with each lowering of the rate; clearly a mortgage with a rate of 5.75% is going to be cheaper than a loan with a 6% rate. This sounds like it would always be a worthwhile investment, but you must keep in mind that you are really paying interest up front. This means that if you do not have that mortgage for a long time, you will have prepaid this interest for no reason. You have to spread the cost of these points over the time you plan to live in the home.
Many times home sellers employ points to get buyers. This is why you will see homes advertised with a notice that the seller is offering to pay points. But keep in mind that this may increase the price of the home by the amount of the points.
There is no obligation on the part of the borrower to pay points. It is a completely voluntary decision based on the borrower’s analysis of the costs involved.
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Tags: home, insurance, life insurance, Mortgage, mortgage life insurance, Real Estate