February 26th, 2018 7:30 AM by Jackie A. Graves
When shopping for a home loan, chances are you are very
interested in the mortgage rate you’ll
pay, and for good reason. It can significantly affect the amount of money
you’ll pay every month for your mortgage payment. Here’s a look at two
important terms you may have come across in your home loan search: Prime Rate
and Mortgage Points.
rate is the short-term interest rate charged by a lender to customers who are
the least likely to default on their loans. The most credit-worthy customers
receive the best or lowest rate that the lender would offer any of its
customers. Each lending institution sets its own prime rate. The rate is almost
always the same among major banks. Adjustments to the rate are made by banks at
the same time, but the rate does not adjust on any regular basis.
prime rate is usually adjusted at the same time and in correlation to the
adjustments of the Fed Funds Rate, a short-term rate objective or target rate
of the Federal Reserve Board. The term prime rate may also refer to the
national prime rate or the WSJ (Wall Street Journal) prime rate. This is an
average posted by the newspaper based on polls of the top 10 banks in the
posted rate has become an index for many types of loans. Lenders use the index
as their base rate, and then add a margin (profit) based primarily on the amount
of risk associated with a loan. This index – often used for consumer loans,
like auto loans, home improvement loans and credit cards – is a popular base
rate used for home equity lines of credit.
are several costs involved in mortgage loan transactions. One of the closing
costs charged by the lender is
called ‘mortgage points’ or just ‘points.’ One ‘point’ is the equivalent of 1
percent of the loan amount. For example, if you purchase a home and borrow
$100,000, every point would cost $1,000. These points are charged by the lender
to obtain the amount borrowed at a particular rate. Points can be negotiated
between the buyer and seller and can be paid by either party.
there are two kinds of mortgage points: origination fees and discount points.
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