Thursday, March 19, 2009

What's the point with Mortgage Points?

Anybody having some knowledge on mortgage, or who has undergone the home purchase process, or has compared mortgage rates, must have come across the term 'Mortgage Points'. Though the term sounds a bit abstract but it's fairly a simple concept.

A mortgage point is nothing but a percentage of the loan amount that has to be paid to the lender. One point simply means 1% of your total amount of loan. For example, say your loan amount is $450,000 and the lender is charging 1%, so it'll be a cost of $4500.

We all know that the mortgage process differs with places all over the world. However the concept of paying mortgage points is quite common in United States. There are basically two types of mortgage points - Discount points and Originating points. Depending on the type, the lenders charge different amounts. So it's wise to choose the one that best suits you. Lets briefly discuss about these two kinds of points:

Discount points: These are prepaid and tax deductible interest that help you to lower your overall mortgage payments. The basic idea here is to pay little extra at the beginning, the interest rate gets decreased by 0.25% with purchase of each point and you can pay less over time.

Originating points: In this type, as the name suggests, you have to pay these points for launching your mortgage. They are not tax deductible and does not have much valued benefits.

Now the question arises, why should you pay mortgage points? Let me give you a simple example. Consider, in the first situation, your lender has offered you a mortgage at 8.75% interest and with no points. Whereas in the second case, say you are offered for 8% interest only if you pay 3 points. Now, over the time period of a 30 year mortgage, you would save money if you choose the second case. But keep in mind, if you plan to live in the home only for a shot span, then avoiding mortgage point is a better option.

In most cases, paying mortgage points has been effective in saving a lot, in the long run.

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