What Are Mortgage Points and How Can They Hurt Me?
In the world of real estate and in the world of buying a home, you may have heard of what mortgage rates are or what they can be. Or maybe you have just heard the phrase before. Either way mortgage points have to do with the closing costs and fees.
Mortgage points are an easy way of saying that you will be charged an “X” amount for obtaining the loan with this mortgage broker or that bank. A point is just another way of referring to the percentage point of the loan amount.
So in essence, if a bank is charging you one point and your loan amount is $100,000, the cost of the mortgage point is $1,000.
More On Mortgage Points
This may seem simple to understand, how much you are being charged and why or why you are not being charged a certain amount is harder to understand.
For example, a lender may not charge you anything out-of-pocket (no points), but offer you a higher interest rate to make up for the difference. So instead of getting a 4.5% rate on a 30-year fixed that you qualify for, you may end up getting a 5% rate and no points.
That may make sense if you don’t plan on staying with the loan or the house for a long period of time, but it could also mean that you are getting a bad deal.
There are situations where you might be charged 1 mortgage point upfront while also getting pushed into the higher rate, effectively paying 2x’s what you should in fees.
Paying Points Can Lower Your Interest Rate
Keep in mind that you can also pay mortgage discount points to lower your interest rate at anytime. So if you qualify for a rate of 4.5%, but desire a rate of 4%, you can pay “x” number of mortgage points to lower the rate to that level. It’s an often unknown as a smart to lower your interest rate.
Paying points are considered a pre-paid interest and are also known as tax deductible, which you are essentially paying the interest upfront at loan closing as opposed to monthly.