Mortgage Payment Calculator –, mortgage points.#Mortgage #points


Mortgage Payment Calculator

Use our mortgage loan calculator to determine the monthly payments for any fixed-rate loan. Just enter the amount and terms, and our mortgage calculator does the rest. Click on “Show Amortization” Table to see how much interest you’ll pay each month and over the lifetime of the loan. The mortgage loan calculator will also show how extra payments can accelerate your payoff and save thousands in interest charges.

Amortization Table

Mortgage points

Mortgage points

Mortgage points

Mortgage points

Whether you’re buying a new home or refinancing, our mortgage calculator can do the math for you. Simply enter the amount, term and interest rate to get your monthly payment amount. If you’re refinancing, enter the current balance on your mortgage into the loan amount section and input the new term and new rate that you’ll receive. Then click on the amortization table to see how much interest you’ll pay over the life of the loan. Add extra payments to find out how they can put your payoff schedule on the fast-track and save you thousands.

Keep in mind that this calculator only calculates the mortgage payment. It does not include taxes, insurance or other fees included in the purchase of your home.

Loan amount: The amount of money you’re borrowing. It’s the cost of your new home minus the down payment if you’re buying or the balance on your existing mortgage if refinancing.

Interest rate: The exact rate you will receive on your loan, not the APR.

Loan term: The length of time you have to pay off your loan (30- and 15-year fixed-rate loans are common terms).

Amortization table: Timetable detailing each monthly payment of a mortgage. Details include the payment, principal paid, interest paid, total interest paid and current balance for each payment period.

Monthly extra payment: Extra amount added to each monthly payment to reduce loan length and interest paid.

Yearly extra payment: Extra amount paid each year to reduce loan length and interest paid.

One-time extra payment: Extra amount added once to reduce loan length and interest paid.

Mortgage points


How to tell if mortgage points are worth the cost, mortgage points.#Mortgage #points


How to tell if mortgage points are worth the cost

Paying points to get a lower rate on a mortgage is almost always a losing proposition.

That’s because most homeowners don’t keep their mortgages long enough to do more than recoup the up-front cost of paying points.

A point is 1% of your loan amount. If you take out a $250,000 mortgage, 1 point equals $2,500.

In the mortgage world, there are two types of mortgage points:

  • Origination points are a fee you must pay a bank or mortgage company to give you a loan.
  • Discount points (the focus of this story) lower the interest rate on your loan and reduce your monthly payments.

Borrowers get a lower rate for paying discount mortgage points because they’re prepaying a portion of the interest on their loan.

Indeed, discount points are tax-deductible, just like the interest you pay with each monthly mortgage payment.

How much can you lower your interest rate by paying points?

Anywhere from one-eighth to one-quarter of a percentage point per discount point.

A range like that makes it absolutely critical to compare offers that include points to those that don’t and determine how much you’re really saving by paying thousands of extra dollars up front.

Some banks and mortgage companies actually promote interest rates in their advertising that are only available by paying mortgage points. They hope you’ll be so wowed by a rate that looks like it’s lower than competitors are charging that you won’t notice the additional up-front cost.

The key question you need to ask is: How long will it take me to recoup what I spend on points through lower monthly mortgage payments?

Considering two typical 30-year fixed-rate mortgages quickly shows how much paying a point will save (or cost) you on a typical $100,000 mortgage.

    • Mortgage Option 1: 4% interest rate with no mortgage points
    • Mortgage Option 2: 3.875% interest rate with 1 point

Paying Mortgage Points: The Tale of Two Loans

Recouping

If you pay 1 point, or $1,000, to get the 3.875% rate, you lower your monthly payments by right at $10 a month. (Our mortgage calculator will determine the monthly payment for any amount or interest rate.)

That means it would take 100 monthly payments, or more than eight years, to recoup the up-front cost of that point.

You won’t really start saving any money until then — and therein lies the problem.

Chances are, you won’t keep your loan much longer than that since the typical homeowner pays off a loan in just over eight years, according to data compiled by Bloomberg News.

Selling or refinancing before the break-even point means you’ll actually wind up paying extra interest on the loan.

If you’ve just bought your dream home and know you’ll keep your low-interest mortgage until your kindergartner graduates from high school, paying points may seem like a smart move.

With interest rates remaining historically low, chances are you won’t need to refinance to reduce your rate.

But you might be forced to refinance or sell your home before you break even on your points if you face an unexpected life challenge like divorce, death of a spouse, disability or a job loss or transfer.

Mortgage points

The 7 biggest mortgage mistakes

Dodging these pitfalls will make you a happier homebuyer now and more satisfied homeowner down the road. You’ll know that you got the best possible mortgage and won’t be overwhelmed by unexpected costs.

That’s why Richard Bettencourt, a mortgage broker in Danvers, Massachusetts, and secretary of the Association of Mortgage Professionals, says paying mortgage points typically isn’t a good financial move.

“The only way I see a point making sense is for that rarity of the person who says, ‘I’m going to make all 360 payments (on a 30-year home loan) and never move,'” he said.

What about having a home seller pay points to buy down your rate? Isn’t that a good deal for a buyer?

“Do you want the seller to reduce your monthly payment by $20 for the next 30 years or give you $7,500 to refinish the kitchen now?” Bettencourt asked.

Another way to look at mortgage points is to consider how much cash you can afford to pay at the loan-closing table, says Mark Palim, vice president of applied economic and housing research for Fannie Mae, a government-owned company that buys mortgage debt.

“If you use up some of your savings toward prepaying your interest, which makes your payment lower on a monthly basis, you have less savings if the water heater breaks,” he pointed out. “Does it make sense to put more of your savings into the transaction to lower the monthly mortgage payments?”


The latest mortgage perk for millennials: reward points, mortgage points.#Mortgage #points


The latest mortgage perk for millennials: Reward points

Your mortgage may come with a bonus: credit-card reward points.

Chase recently announced it will give 100,000 reward points, worth up to $1,500, to existing credit-card customers who take out a home loan with the bank between now and Aug. 6.

The bank is not the first to offer credit-card perks in exchange for home loans. In the last year, Capital One offered cardholders earned air travel miles if they purchased property or refinanced their home with the bank, Wells Fargo gave out rebates to cardholders to use for its mortgages and home equity loans, and Quicken Loans doled out points for some of its borrowers.

Mortgage points

However, the sheer size of the mortgage offer from Chase is new. “The 100,000 points is one of the most generous — and perhaps tops — that we’ve seen for financial products,” said Greg McBride, chief financial analyst at Bankrate.com. “But it doesn’t negate the need to shop around for the best deal or justify settling for an inferior loan that could cost far more in the long run.”

Banks are spending more on credit-card rewards to build loyal customers for other parts of their businesses, said Nick Clements, co-founder of MagnifyMoney.com, a price-comparison website.

Millennials are a prime target. For example, at Chase, 36 percent of mortgages last year were taken out by borrowers who were under 35 years old or younger, up from 20 percent in 2015.

A recent MagnifyMoney analysis found that the six largest credit-card issuers spent $22.6 billion on rewards, more than double the $10.6 billion they paid in 2010. (See chart below.)

Mortgage points

A mortgage is usually the biggest financial transaction anyone will make, Clements said, so borrowers should focus more on the rate and closing costs to select the best deal rather than how many reward points they will earn.

Keep in mind that credit-card rewards may be fleeting and are ever-changing, said Matt Schulz, a senior industry analyst at CreditCards.com. For example, when Chase Sapphire Reserve debuted last summer, the card initially offered a sign-up bonus worth $1,500 to people who spent $4,000 on the card in the first three months.

Earlier this year, Chase cut the generous sign-up bonuses for the card in half, and JPMorgan Chase CEO Jaime Dimon said the perks cost the bank at least $200 million to $300 million.

Mortgage points


Topic No, mortgage points.#Mortgage #points


mortgage points

Mortgage points

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Mortgage points

  1. Home
  2. Tax Topics
  3. Topic No. 504 Home Mortgage Points

Topic Number: 504 – Home Mortgage Points

The term points is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A (PDF), Itemized Deductions. If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you can’t deduct all the interest on your mortgage and you can’t deduct all your points. See Publication 936, Home Mortgage Interest Deduction, to figure your deductible points in that case. Refer to Topic No. 505 and Can I Deduct My Mortgage-Related Expenses? for more information on deducting mortgage interest and points.

You can deduct the points in full in the year you pay them, if you meet all the following requirements:

  1. Your main home secures your loan (your main home is the one you live in most of the time).
  2. Paying points is an established business practice in the area where the loan was made.
  3. The points paid weren’t more than the amount generally charged in that area.
  4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
  5. The points paid weren’t for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  6. The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You can’t have borrowed the funds from your lender or mortgage broker in order to pay the points.
  7. You use your loan to buy or build your main home.
  8. The points were computed as a percentage of the principal amount of the mortgage, and
  9. The amount shows clearly as points on your settlement statement.

You can also fully deduct (in the year paid) points paid on a loan to improve your main home if you meet tests one through six above. Points that don’t meet these requirements may be deducted ratably over the life of the loan. You can deduct points paid for refinancing generally only over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees aren’t interest and can’t be deducted. Points paid by the seller of a home can’t be deducted as interest on the seller’s return, but they’re a selling expense that will reduce the amount of gain realized. The buyer may deduct points paid by the seller, provided the buyer subtracts the amount from the basis or cost of the residence. You can only deduct points you pay on loans secured by your second home over the life of the loan.

You may be subject to a limit on some of your itemized deductions, including points. For more information on the adjusted gross income limitations, please refer to the Form 1040 (PDF) and Topic No. 501.

For more information on points, refer to Publication 936, Home Mortgage Interest Deduction.


How to tell if mortgage points are worth the cost, mortgage points.#Mortgage #points


How to tell if mortgage points are worth the cost

Paying points to get a lower rate on a mortgage is almost always a losing proposition.

That’s because most homeowners don’t keep their mortgages long enough to do more than recoup the up-front cost of paying points.

A point is 1% of your loan amount. If you take out a $250,000 mortgage, 1 point equals $2,500.

In the mortgage world, there are two types of mortgage points:

  • Origination points are a fee you must pay a bank or mortgage company to give you a loan.
  • Discount points (the focus of this story) lower the interest rate on your loan and reduce your monthly payments.

Borrowers get a lower rate for paying discount mortgage points because they’re prepaying a portion of the interest on their loan.

Indeed, discount points are tax-deductible, just like the interest you pay with each monthly mortgage payment.

How much can you lower your interest rate by paying points?

Anywhere from one-eighth to one-quarter of a percentage point per discount point.

A range like that makes it absolutely critical to compare offers that include points to those that don’t and determine how much you’re really saving by paying thousands of extra dollars up front.

Some banks and mortgage companies actually promote interest rates in their advertising that are only available by paying mortgage points. They hope you’ll be so wowed by a rate that looks like it’s lower than competitors are charging that you won’t notice the additional up-front cost.

The key question you need to ask is: How long will it take me to recoup what I spend on points through lower monthly mortgage payments?

Considering two typical 30-year fixed-rate mortgages quickly shows how much paying a point will save (or cost) you on a typical $100,000 mortgage.

    • Mortgage Option 1: 4% interest rate with no mortgage points
    • Mortgage Option 2: 3.875% interest rate with 1 point

Paying Mortgage Points: The Tale of Two Loans

Recouping

If you pay 1 point, or $1,000, to get the 3.875% rate, you lower your monthly payments by right at $10 a month. (Our mortgage calculator will determine the monthly payment for any amount or interest rate.)

That means it would take 100 monthly payments, or more than eight years, to recoup the up-front cost of that point.

You won’t really start saving any money until then — and therein lies the problem.

Chances are, you won’t keep your loan much longer than that since the typical homeowner pays off a loan in just over eight years, according to data compiled by Bloomberg News.

Selling or refinancing before the break-even point means you’ll actually wind up paying extra interest on the loan.

If you’ve just bought your dream home and know you’ll keep your low-interest mortgage until your kindergartner graduates from high school, paying points may seem like a smart move.

With interest rates remaining historically low, chances are you won’t need to refinance to reduce your rate.

But you might be forced to refinance or sell your home before you break even on your points if you face an unexpected life challenge like divorce, death of a spouse, disability or a job loss or transfer.

Mortgage points

The 7 biggest mortgage mistakes

Dodging these pitfalls will make you a happier homebuyer now and more satisfied homeowner down the road. You’ll know that you got the best possible mortgage and won’t be overwhelmed by unexpected costs.

That’s why Richard Bettencourt, a mortgage broker in Danvers, Massachusetts, and secretary of the Association of Mortgage Professionals, says paying mortgage points typically isn’t a good financial move.

“The only way I see a point making sense is for that rarity of the person who says, ‘I’m going to make all 360 payments (on a 30-year home loan) and never move,'” he said.

What about having a home seller pay points to buy down your rate? Isn’t that a good deal for a buyer?

“Do you want the seller to reduce your monthly payment by $20 for the next 30 years or give you $7,500 to refinish the kitchen now?” Bettencourt asked.

Another way to look at mortgage points is to consider how much cash you can afford to pay at the loan-closing table, says Mark Palim, vice president of applied economic and housing research for Fannie Mae, a government-owned company that buys mortgage debt.

“If you use up some of your savings toward prepaying your interest, which makes your payment lower on a monthly basis, you have less savings if the water heater breaks,” he pointed out. “Does it make sense to put more of your savings into the transaction to lower the monthly mortgage payments?”


How Mortgage Discount Points Work, The Truth About, mortgage points.#Mortgage #points


How Mortgage Discount Points Work

I think it goes without saying that everyone with a mortgage (or thinking about getting one) wants the lowest interest rate possible. After all, who wouldn t want to save money each month for the next 30 years or so of their life?

Remember, this isn t a one-off purchase, it s a decision that will affect your pocketbook month after month for the foreseeable future. So getting the pricing right is imperative.

Let s say you qualify for a mortgage at a rate of 5%, but you re not happy with the rate. Assuming your attempt to negotiate your mortgage rate lower fails, you do have another option.

What are mortgage discount points?

Mortgage points

That brings us to the topic of “mortgage discount points,” which can be paid at closing to reduce your mortgage rate.

Simply put, you have the option to pay a percentage of the loan amount, also known as a mortgage point, to lower your interest rate by a certain amount.

For the record, the ratio of points to rate discount is never perfectly proportional. So I can t tell you that one discount point will equate to a .25% reduction in rate. It always varies.

But I can mention that discount points are considered a form of prepaid interest because the upfront cost lowers the amount of interest you would normally pay during the loan term. The good news is that means they re also tax deductible.

Let s look at an example of discount points in action:

Loan amount: $200,000

Par rate: 5% (what you qualify for at no cost)

Desired interest rate: 4.5%

Total cost: 2 discount points ($4,000)

Say you qualify for an interest rate of 5% with no costs other than a loan origination fee of 1% ($2,000). But you want to secure an even lower mortgage rate, perhaps 4.5%. In order to do so, you re told you ll need to come up with more money at closing to pay mortgage discount points.

The mortgage broker or bank will do the math and determine that you need to pay X amount of discount points to lower your interest rate by a half of a percentage point.

In our example, it would take two discount points to lower your rate by the desired 0.5%. Again, this can vary, but we ll use those numbers to illustrate the potential cost.

The cost of two mortgage discount points on a $200,000 loan amount is $4,000 (2% of $200k = $4,000) to obtain the desired mortgage rate, as seen on the GFE pictured above.

That $4,000 would lower your monthly mortgage payment from $1,073.64 to $1,013.37, a savings of roughly $60 a month. So in exchange for lower mortgage payments each month, you d pay more at closing. That s the tradeoff.

A lower rate would also help you pay down your mortgage balance faster, something that also needs to be considered alongside the monthly savings.

If you decided that a rate of 5% was good enough, you would avoid paying the discount points and reduce closing costs substantially. In our example, you d have $4,000 in your pocket, instead of wrapped up in your mortgage.

Does it make sense to lower my rate using mortgage discount points?

Before actually paying mortgage discount points, you need to be sure it actually makes sense to buy down your interest rate – the answer to this question will vary greatly depending on what mortgage rate you are initially offered, how much it costs to buy down the rate, and how long you plan to stay with the mortgage/in the home.

In our example, you essentially need to recoup the $4,000 spent on discount points in order to make it a good deal. The only way to get that money back is to pay your reduced-rate mortgage each month for a period long enough to where you cover the upfront cost and begin saving money each month. This is known as your breakeven period.

As mentioned above, the lower interest rate means your mortgage is paid down faster because a greater portion of the payment each month is going toward the principal balance as opposed to interest. This can also get you closer to that key breakeven point.

As a rule of thumb, mortgage discounts points make more sense for those who plan to stick with their mortgage for the long-haul, as the interest saved over the years can be exponential. On the other hand, if you plan to move or refinance again in the near future, paying mortgage discount points could be a complete waste of money.

While mortgages generally have terms of 15 or 30 years, most homeowners don t see them through to maturation. Not even close. Instead, they sell or refinance long before that time. So there are definitely a lot of borrowers out there leaving money on the table when paying points.

Also be sure to consider your asset situation before making the decision. If you don t have a lot of money saved up, you won t want to blow what little you do have lowering your mortgage rate by some incidental amount. It ll just make you more house poor.

You always have the option to pay more toward the principal balance each month if you want to save on interest, even if you didn t elect to pay points at closing. Doing so could accomplish the same basic objective while giving you more flexibility.

And as I mentioned earlier, mortgage discount points aren t a perfect science, meaning it could cost three points to lower your interest rate one percent, or just two points to lower it three-quarters of a percentage point.

So be sure you ask your mortgage broker or loan officer about all possible options to ensure you get the very most out of your mortgage discount points.

Tip: Don t focus on a certain interest rate, as the cost may not justify the discount. For example, if you have your eye on a 4% mortgage rate, don t just blindly pay for it so you can tell your friends about your low rate. If the cost isn t justified, look at other options. It may cost half the price to go with a rate of 4.25% instead.


Topic No, mortgage points.#Mortgage #points


mortgage points

Mortgage points

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Mortgage points

  1. Home
  2. Tax Topics
  3. Topic No. 504 Home Mortgage Points

Topic Number: 504 – Home Mortgage Points

The term points is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A (PDF), Itemized Deductions. If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you can’t deduct all the interest on your mortgage and you can’t deduct all your points. See Publication 936, Home Mortgage Interest Deduction, to figure your deductible points in that case. Refer to Topic No. 505 and Can I Deduct My Mortgage-Related Expenses? for more information on deducting mortgage interest and points.

You can deduct the points in full in the year you pay them, if you meet all the following requirements:

  1. Your main home secures your loan (your main home is the one you live in most of the time).
  2. Paying points is an established business practice in the area where the loan was made.
  3. The points paid weren’t more than the amount generally charged in that area.
  4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
  5. The points paid weren’t for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  6. The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You can’t have borrowed the funds from your lender or mortgage broker in order to pay the points.
  7. You use your loan to buy or build your main home.
  8. The points were computed as a percentage of the principal amount of the mortgage, and
  9. The amount shows clearly as points on your settlement statement.

You can also fully deduct (in the year paid) points paid on a loan to improve your main home if you meet tests one through six above. Points that don’t meet these requirements may be deducted ratably over the life of the loan. You can deduct points paid for refinancing generally only over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees aren’t interest and can’t be deducted. Points paid by the seller of a home can’t be deducted as interest on the seller’s return, but they’re a selling expense that will reduce the amount of gain realized. The buyer may deduct points paid by the seller, provided the buyer subtracts the amount from the basis or cost of the residence. You can only deduct points you pay on loans secured by your second home over the life of the loan.

You may be subject to a limit on some of your itemized deductions, including points. For more information on the adjusted gross income limitations, please refer to the Form 1040 (PDF) and Topic No. 501.

For more information on points, refer to Publication 936, Home Mortgage Interest Deduction.


Topic No, mortgage points.#Mortgage #points


mortgage points

Mortgage points

Information Menu

Help Menu Mobile

Main navigation

Information Menu

Main navigation

Info Menu Mobile

Mortgage points

  1. Home
  2. Tax Topics
  3. Topic No. 504 Home Mortgage Points

Topic Number: 504 – Home Mortgage Points

The term points is used to describe certain charges paid to obtain a home mortgage. Points are prepaid interest and may be deductible as home mortgage interest, if you itemize deductions on Form 1040, Schedule A (PDF), Itemized Deductions. If you can deduct all of the interest on your mortgage, you may be able to deduct all of the points paid on the mortgage. If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you can’t deduct all the interest on your mortgage and you can’t deduct all your points. See Publication 936, Home Mortgage Interest Deduction, to figure your deductible points in that case. Refer to Topic No. 505 and Can I Deduct My Mortgage-Related Expenses? for more information on deducting mortgage interest and points.

You can deduct the points in full in the year you pay them, if you meet all the following requirements:

  1. Your main home secures your loan (your main home is the one you live in most of the time).
  2. Paying points is an established business practice in the area where the loan was made.
  3. The points paid weren’t more than the amount generally charged in that area.
  4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
  5. The points paid weren’t for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  6. The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You can’t have borrowed the funds from your lender or mortgage broker in order to pay the points.
  7. You use your loan to buy or build your main home.
  8. The points were computed as a percentage of the principal amount of the mortgage, and
  9. The amount shows clearly as points on your settlement statement.

You can also fully deduct (in the year paid) points paid on a loan to improve your main home if you meet tests one through six above. Points that don’t meet these requirements may be deducted ratably over the life of the loan. You can deduct points paid for refinancing generally only over the life of the new mortgage. However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six requirements stated above, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan. Points charged for specific services, such as preparation costs for a mortgage note, appraisal fees, or notary fees aren’t interest and can’t be deducted. Points paid by the seller of a home can’t be deducted as interest on the seller’s return, but they’re a selling expense that will reduce the amount of gain realized. The buyer may deduct points paid by the seller, provided the buyer subtracts the amount from the basis or cost of the residence. You can only deduct points you pay on loans secured by your second home over the life of the loan.

You may be subject to a limit on some of your itemized deductions, including points. For more information on the adjusted gross income limitations, please refer to the Form 1040 (PDF) and Topic No. 501.

For more information on points, refer to Publication 936, Home Mortgage Interest Deduction.


How Mortgage Discount Points Work, The Truth About, mortgage points.#Mortgage #points


How Mortgage Discount Points Work

I think it goes without saying that everyone with a mortgage (or thinking about getting one) wants the lowest interest rate possible. After all, who wouldn t want to save money each month for the next 30 years or so of their life?

Remember, this isn t a one-off purchase, it s a decision that will affect your pocketbook month after month for the foreseeable future. So getting the pricing right is imperative.

Let s say you qualify for a mortgage at a rate of 5%, but you re not happy with the rate. Assuming your attempt to negotiate your mortgage rate lower fails, you do have another option.

What are mortgage discount points?

Mortgage points

That brings us to the topic of “mortgage discount points,” which can be paid at closing to reduce your mortgage rate.

Simply put, you have the option to pay a percentage of the loan amount, also known as a mortgage point, to lower your interest rate by a certain amount.

For the record, the ratio of points to rate discount is never perfectly proportional. So I can t tell you that one discount point will equate to a .25% reduction in rate. It always varies.

But I can mention that discount points are considered a form of prepaid interest because the upfront cost lowers the amount of interest you would normally pay during the loan term. The good news is that means they re also tax deductible.

Let s look at an example of discount points in action:

Loan amount: $200,000

Par rate: 5% (what you qualify for at no cost)

Desired interest rate: 4.5%

Total cost: 2 discount points ($4,000)

Say you qualify for an interest rate of 5% with no costs other than a loan origination fee of 1% ($2,000). But you want to secure an even lower mortgage rate, perhaps 4.5%. In order to do so, you re told you ll need to come up with more money at closing to pay mortgage discount points.

The mortgage broker or bank will do the math and determine that you need to pay X amount of discount points to lower your interest rate by a half of a percentage point.

In our example, it would take two discount points to lower your rate by the desired 0.5%. Again, this can vary, but we ll use those numbers to illustrate the potential cost.

The cost of two mortgage discount points on a $200,000 loan amount is $4,000 (2% of $200k = $4,000) to obtain the desired mortgage rate, as seen on the GFE pictured above.

That $4,000 would lower your monthly mortgage payment from $1,073.64 to $1,013.37, a savings of roughly $60 a month. So in exchange for lower mortgage payments each month, you d pay more at closing. That s the tradeoff.

A lower rate would also help you pay down your mortgage balance faster, something that also needs to be considered alongside the monthly savings.

If you decided that a rate of 5% was good enough, you would avoid paying the discount points and reduce closing costs substantially. In our example, you d have $4,000 in your pocket, instead of wrapped up in your mortgage.

Does it make sense to lower my rate using mortgage discount points?

Before actually paying mortgage discount points, you need to be sure it actually makes sense to buy down your interest rate – the answer to this question will vary greatly depending on what mortgage rate you are initially offered, how much it costs to buy down the rate, and how long you plan to stay with the mortgage/in the home.

In our example, you essentially need to recoup the $4,000 spent on discount points in order to make it a good deal. The only way to get that money back is to pay your reduced-rate mortgage each month for a period long enough to where you cover the upfront cost and begin saving money each month. This is known as your breakeven period.

As mentioned above, the lower interest rate means your mortgage is paid down faster because a greater portion of the payment each month is going toward the principal balance as opposed to interest. This can also get you closer to that key breakeven point.

As a rule of thumb, mortgage discounts points make more sense for those who plan to stick with their mortgage for the long-haul, as the interest saved over the years can be exponential. On the other hand, if you plan to move or refinance again in the near future, paying mortgage discount points could be a complete waste of money.

While mortgages generally have terms of 15 or 30 years, most homeowners don t see them through to maturation. Not even close. Instead, they sell or refinance long before that time. So there are definitely a lot of borrowers out there leaving money on the table when paying points.

Also be sure to consider your asset situation before making the decision. If you don t have a lot of money saved up, you won t want to blow what little you do have lowering your mortgage rate by some incidental amount. It ll just make you more house poor.

You always have the option to pay more toward the principal balance each month if you want to save on interest, even if you didn t elect to pay points at closing. Doing so could accomplish the same basic objective while giving you more flexibility.

And as I mentioned earlier, mortgage discount points aren t a perfect science, meaning it could cost three points to lower your interest rate one percent, or just two points to lower it three-quarters of a percentage point.

So be sure you ask your mortgage broker or loan officer about all possible options to ensure you get the very most out of your mortgage discount points.

Tip: Don t focus on a certain interest rate, as the cost may not justify the discount. For example, if you have your eye on a 4% mortgage rate, don t just blindly pay for it so you can tell your friends about your low rate. If the cost isn t justified, look at other options. It may cost half the price to go with a rate of 4.25% instead.


What Are Mortgage Points, The Truth About, mortgage points.#Mortgage #points


What Are Mortgage Points?

Mortgage points

Mortgage Q A: What are mortgage points?

The mortgage process can be pretty stressful and hard to make sense of at times, what with all the crazy terminology and stacks of paperwork.

Further complicating matters is the fact that banks and lenders do things differently. Some charge so-called loan application fees while others ask that you pay points. Then there are those that tack on fees and points.

While shopping for a home loan, you ll likely hear the term mortgage point on more than one occasion.

Be sure to pay special attention to how many points are being charged (if any), as it will greatly affect the true cost of your loan.

How Much Is a Mortgage Point?

Wondering how mortgage points are calculated?

Well, when it comes down to it, a mortgage point is just a fancy way of saying a percentage point of the loan amount.

Essentially, when a mortgage broker or mortgage lender says they re charging you one point, they simply mean 1% of your loan amount, whatever that might be.

How do you calculate points on a mortgage?

Mortgage points

So if your loan amount is $400,000, one mortgage point would be equal to $4,000. If they decide to charge two points, the cost would be $8,000. And so on.

If your loan amount is $100,000, it s simply $1,000 per point. It s a really easy calculation. Simply multiply the number of points (or fraction thereof) times the loan amount.

If it s one point, input .01 multiplied by the loan amount. If it s 1.5 points, input .015 multiplied by the loan amount.

Using $300,000 as the loan amount in the above equation, we d come up with a cost of $3,000 and $4,500, respectively.

Clearly a mortgage point can vary greatly based on the loan amount, so not all mortgage points are created equal folks.

Tip: The larger your loan amount, the more expensive mortgage points become, so points may be more plentiful on smaller mortgages if they re being used for commission.

There Are Two Types of Mortgage Points

There are two types of mortgage points you could be charged when obtaining a mortgage.

A mortgage broker or bank may charge mortgage points simply for originating your loan, known as the loan origination fee. This fee may be in addition to other lender costs, or a lump sum that covers all of their costs and commission.

For example, you might be charged one mortgage point plus a loan application and processing fee, or simply charged two mortgage points and no other lender fees.

Additionally, you also have the choice to pay mortgage discount points, which are a form of prepaid interest paid at closing in exchange for a lower interest rate.

They are used to buy down your interest rate, assuming you want a lower rate than what is being offered. Generally you should only pay these types of points if you plan to hold the loan long enough to recoup the costs via the lower rate. These types of mortgage points are tax deductible, seeing that they are straight-up interest.

*The loan origination fee may also be tax deductible if it s expressed as a percentage of the loan amount and certain other IRS conditions are met.

If you aren t being charged mortgage points directly (no cost refi), it doesn t necessarily mean you re getting a better deal. All it means is that the mortgage broker or lender is charging you on the back-end of the deal. There is no free lunch.

In other words, the lender is simply offering you an interest rate that exceeds the par rate, or market rate you would typically qualify for.

So if your particular loan scenario had a par rate of say 6%, but the mortgage broker or bank could earn two mortgage points on the back if he/she convinced you to take a rate of 6.75%, that would be their yield-spread-premium (YSP), or commission.

Banks can offer mortgages without points as well because of the “service release premium” (their form of YSP), which is a fee they earn when they sell their loans on the secondary market.

Sure, you might not pay any mortgage points out-of-pocket, but you will pay the price by agreeing to a higher mortgage rate than necessary, which equates to a lot more interest paid throughout the life of the loan.

Before YSP was outlawed, this was a common way for a broker to earn a commission without charging the borrower directly. Nowadays, brokers can still be compensated by lenders, but not for offering you a higher mortgage rate than what you qualify for.

How do negative points work on a mortgage?

If points are involved and you are offered a higher rate, the mortgage points act as a lender credit toward your closing costs. These are known as negative points because they actually raise your interest rate.

Now you might be wondering why on earth you would accept a higher rate than what you qualify for?

Well, the trade-off is that you don t have to pay for your closing costs out-of-pocket. The money generated from the higher interest rate will cover those fees. Of course, your monthly mortgage payment will be higher as a result. How much higher depends on the size of your loan amount and the points involved.

This works in the exact opposite way as traditional mortgage points in that you get a higher rate, but instead of paying for it, the lender gives you money to pay for your fees.

Both methods can work for a borrower in a given situation. The positive points are good for those looking to lower their mortgage rate even more, whereas the negative points are good for a homeowner short on cash who doesn t want to spend it all at closing.

Let s look at some examples of mortgage points in action, shall we:

Say you ve got a $100,000 loan amount and you re using a broker. If the broker is being paid two mortgage points from the lender at par to the borrower, it will show up as a $2,000 origination charge (line 801) and a $2,000 credit (line 802) on the HUD-1 settlement statement. It is awash because you don t pay the points, the lender does. However, a higher mortgage rate is built in as a result.

Now let s assume you re just paying two points out of your own pocket to compensate the broker. It would simply show up as a $2,000 origination charge, with no credit or charge for points, since the rate itself doesn t involve any points.

You may also see nothing in the way of points and instead an administration fee or similar vaguely named charge. This could be the lender s commission bundled up into one charge that covers things like underwriting, processing, and so on. It could represent a certain percentage of the loan amount, but have nothing to do with raising or lowering your rate.

Regardless of the number of mortgage points you re ultimately charged, you ll be able to see all the figures by reviewing the HUD-1 (lines 801-803), which details both loan origination fees and discount points and the total cost combined.

*These fees will now show up on the Loan Estimate (LE) and Closing Disclosure (CD) under the Loan Costs section.

Mortgage Points Cost Chart

Mortgage points

Above is a handy little chart I made that displays the cost of mortgage points for different loans amounts, ranging from $100,000 to $1 million.

As you can see, a mortgage point is only equal to $1,000 at the $100,000 loan amount level. So you might be charged several points if you ve got a smaller loan amount (they need to make money somehow).

At $1 million, you re looking at $10,000 for just one mortgage point. And you wonder why loan officers want to originate the largest loans possible

Generally, it s the same amount of work for a much bigger payday if they can get their hands on the super jumbo loans out there.

Be sure to compare the cost of the loan with and without mortgage points included. Also remember that mortgage points can be paid out-of-pocket or priced into the interest rate of the loan.

Also note that not every bank and broker charges mortgage points, so if you take the time to shop around, you may be able to avoid mortgage points entirely while securing the lowest mortgage rate possible.