November 7th, 2017 7:11 AM by Jackie A. Graves, President
The structure of home mortgages varies
around the world. Paying for mortgage points is a
common practice in the United States and, at least according to anecdotal
evidence, it may be a uniquely American approach to home financing. In this
article, we'll discuss the different mortgage points and how to make them work for you.
points come in two varieties: origination points and discount points. In both cases, each point is equal to 1% of
the total amount mortgaged. For example, on a $100,000 home, one point is equal
to $1,000. Origination points are used to compensate loan officers. Not all
mortgage providers require the payment of origination points, and those that do
are often willing to negotiate the fee. Origination points are not tax
points are prepaid interest. The
purchase of each point generally lowers the interest rate on your mortgage by
0.25%. Most lenders provide
the opportunity to purchase anywhere from zero to three discount points. We
will focus mainly on discount points and how they can decrease your overall
mortgage payments. It is important to note; however, that when lenders
advertise rates, they often show a rate that is based on the purchase of
points. If you itemize your taxes,
discount points are tax deductible on Schedule A.
Should You Pay For Points?
decision of whether or not to pay for points focuses on discount points and
requires being able to understand the mortgage payment
structure. There are two primary factors to weigh when considering
whether or not to pay for discount points. The first involves the length of
time that you expect to live in the house. In general, the longer you plan to
stay, the bigger your savings if you purchase discount points. Consider the
the three discount points would cost you $3,000 in exchange for a savings of
$47.35 per month. You will need to keep the house for 63 months to break even
on the point purchase. Since a 30-year loan lasts 360 months, purchasing points
is a wise move if you plan to live in your new home for a long time. If on the
other hand, you plan to stay only for a few years, you may wish to purchase
fewer points or none at all. There are numerous calculators available on the
internet to assist you in determining the appropriate amount of discount points
to purchase based on the length of time you plan to own the home.
second consideration with the purchase of discount points involves whether or
not you have enough money to pay for them. Many people are barely able to
afford the down payment and closing costs on their home purchases,
and sometimes there simply isn't enough money left to purchase points. On a
$100,000 home, three discount points are relatively affordable, but on a
$500,000 home, three points will cost $15,000. On top of the traditional 20%
down payment of $100,000 for the $500,000 home, another $15,000 is often more
than people can afford. The Investopedia
Monthly Mortgage Calculator is a good resource to budget these
people argue that money paid on discount points could be invested in the stock
market and used to generate a higher return than the amount
saved by paying for the points. But, for the average homeowner, the fear of
getting into a mortgage they can't afford outweighs the potential benefit that
may be accrued if they managed to select the right investment. Many times, just being
able to pay off your mortgage is more important.
it is important to keep in mind the motivation behind purchasing a home. While
most people hope to see their homes increase in value, few people purchase
their homes strictly as investments. From an investment perspective, if your
home triples in value, you are unlikely to sell it for the simple reason that
you then would need somewhere else to live.
your home gains in value, it is likely that most of the other homes in your
area have increased in value as well. If that is the case, selling your home
will give you only enough money to purchase another home for near the same
price. Also, if you take the full 30 years to pay off your mortgage, you will
likely have paid nearly triple the home's original selling price in principal
and interest costs and, therefore, you won't
make much in the way of real profit if you sell at the higher price.
a home is a major financial decision. Plan carefully. Look at the numbers.
Before you start shopping, decide on the amount of the monthly payments that
you can afford, and determine exactly how you will get to that payment –
whether it's by making a large down payment, purchasing discount points or
buying a less expensive home.
it's time to shop around. Don't settle for the first mortgage package that you happen to
stumble across. There are plenty of banks to choose from and numerous
resources, including real estate agents, mortgage brokers, and the internet that can
help you shop for the best deal for your situation.
By Lisa Smith – To view the original article click here