Quick Overview Regarding Loan Points
Let’s face it. The mortgage process is challenging and sometimes stressful, and a lot of the jargon used can be misunderstood. One type of term that is frequently used by industry professionals when applying to buy a home or a refinance your mortgage is the term “points,” sometimes known as “discount points.” These points are a way of describing how much you will pay for your mortgage and the cost to pay down your interest rate.
What are points?
In the most straight-forward explanation, a point is equal to 1 percent of the loan amount. This means that, on a mortgage loan of $450,000, one point would be $4,500. In a large majority of transactions, the lender is paid the point(s) at the closing of the loan. The usual points charged are two or three points. This is especially true if the loan is not a qualified mortgage.
Points are offered in two basic varieties:
– Origination points. These are fees paid to the mortgage company or loan officer for their work in closing your loan. They are not tax-deductible, but may be lowered the lender based on other variables and loan product criteria
– Discount points. Discount points are basically prepaid interest fees. These points lower the interest rate on your loan. Discount points are tax deductible.
Should I pay points?
This can be quite complicated for each borrower. However, the general rule of thumb is it largely depends on how long you intend to stay in the home, keep the loan, or own the property. While it is true your costs will be higher in the beginning, a lower interest rate can save you much more money in the end. On the other hand, if your plan is to sell after a few years, settling for a higher interest rate may end up being less.
The Federal Reserve did what many economic experts had forecast earlier this month by raising the federal funds rate by a quarter percentage point, from 1.25% to 1.5%. This was the fifth quarter percentage-point increase in the last 24 months.
Short-term fixed loans have been impacted by this action. Interest rates for the 5/1 ARM, have increased during the latter part of 2017. The fed funds rate influences other short-term rates such as the LIBOR index. This is why paying attention to what the Fed does is important. This will affect the buying power of consumers which includes home buyers.
The majority of home buyers opt for the 30-year fixed-rate loan. While it is true there has been some rate movements with the 30-year fixed loan due to actions of the Fed a couple years ago, the rate quote you get today for a 30-year fixed is not too far off the rate you from two years ago.
If it was far off, you may have to pay discount points to bring the rate down to where you feel comfortable with the monthly payment. Discuss your options with a licensed loan officer.
