A Quick Guide To Understanding Mortgage Discount Points

Mortgage terms can be confusing to the average home buyer. Even if you have a basic understanding of mortgages, there are many concepts that you may not have been aware of or never heard of before. The more you understand mortgage terms and concepts, the better equipped you will be when it comes time to decide on whether or not to apply for a mortgage loan.

1. What Are Mortgage Discount Points?

The simplest way to understand mortgage discount points is to consider them as discount points, essentially they are a type of points that you use to reduce the interest rate on your mortgage. They usually work on the basis that at each point that you give the lender, that same amount will be deducted from your interest rate.

2. Types Of Discount Points

There are two basic types of discount points, discount, and origination. Origination points are a type of fee that is paid for the processing, evaluation approval of your mortgage loan, whereas discount points are to lower the interest rate of your loan.

3. The Cost Of Mortgage Points

In all fair honesty, the cost of these mortgages depends on a lot of factors that each lender is going to evaluate differently, for example, the interest rate, the amount, the upfront amount that you will pay, how long you expect to stay in the house, are some of the factors that are considered when you need to find the cost of mortgage points.

4. Are Mortgage Points Worth It?

If you are considering whether mortgage points are worth it or not, the one thing that will help you decide is going to be by running the numbers. You have to determine whether you will have the cash available after you have paid the initial deposit, closing cost, down payments, and saved some for unexpected expenses. The best person to help you figure out if paying for is going to be right for you is your lender, but you can get a pretty good idea by determining the break-even point. You can calculate that by dividing your up-front mortgage points cost into your monthly payment savings.

The above calculation will give you the break-even points in months, the lesser the number the better considering the quicker you break even, the more you will save during the mortgage tenure.

To Wrap Things Up!

Mortgage points are a great asset if you want to save a good amount of money in the long run when you get a mortgage for your home. But the thing that you need to consider is that you should have that initial cash for buying your points and at the same time, you should also have a break-even point that is relatively small so that you can break even quickly and hence be able to save a hefty amount by the time you end your home mortgage.

So if you are looking for a mortgage for your home you should consider mortgage points as a way to save as much as possible from your mortgage.