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What are Mortgage Points?

by Carol Bell
(Carbondale, IL, USA)

Even though this has been a poor time for homeowners, it has been a good time for me personally. I know that this is a good time to purchase a home because of the home prices. I know that I can get a good deal for the money that I have and I have pretty good credit.

I guess that I am one of the few that waited and happen to be able to capitalize on the downturn of the mortgage industry. I have been looking for homes for awhile and I have found one that I particularly like.

After looking into a loan for my home and applying for mortgages, I have run across an issue and I am not sure what a certain term means and how it applies to me as a home buyer.

I would like to know what it means by mortgage points when you apply for a loan. I am a first time buyer and I have a substantial down payment but when I'm looking for a loan, I see mortgage points.

I have no idea what that means and how that affects that loan that I am trying to seek. I have run across information about mortgage points vs a higher interest rate, but I am still quite a bit confused. Is this something that would be a good thing to purchase so that I can have a lower interest rate or would there be a certain situation when it would be better to purchase mortgage points as opposed to not purchasing them. If I purchase a new home in the future, is this something that I can do again? How will it affect me in the long run?

Any help would be appreciated.

===ANSWERS===

Hi Carol,

Good questions. Many first time home buyers are confused by the term mortgage points.

Basically they are used to buy down an interest rate. Many times they are called discount points.

The ratio for buying them varies from lender to lender. Sometimes in order to buy down 1/4 of a point on your interest rate, you may pay 1/2 a percent of your loan amount to get it.

So you have to weigh out the benefits. Buying down 1/4 point on your mortgage interest rate may save you $10.00 per month on a payment. But if it cost you several thousand dollars to get it, you must decide if it's worth the effort and cost.

Normally buying down interest rates using points does not make a big enough change in the monthly payment to make it worth while.

I suggest you simply pay an extra $25-$50 a month on your payment and the benefits are even greater over time and it helps you pay off your mortgage sooner, thus saving you money on interest without buying points.

I hope this makes sense. It's kind of hard to explain to someone who has never been in the mortgage business.

Almost every time when applying for a home loan you can buy points to lower your rate.

Hope this helps!

Jeff

Comments for What are Mortgage Points?

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What are Mortgage Points
by: Connie

I had the very same question. Now I understand mortgage points. Thank you so much for asking the question and contributing for the rest of us!

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