The idea of buying and selling demands a sober mind, especially when the transaction involves a considerable amount of money like the one encountered in the mortgage contract. A mortgage contract demands a crucial understanding and appropriate decision making skill on whether to consider buying down the rate or not. Buying down the rate is also known as paying mortgage points.
Definition of mortgage points
Mortgage points come in different kinds. However, the most crucial ones that must be considered in his case are the points that help in earning a discount on the mortgage value. The discount points lower the interest rate of the mortgage. The lenders consider it a fair deal to include mortgage points because lenders do not spend their entire time in the borrowed homes for the rest of the duration loan.
Precisely, mortgage points are the upfront payment of interest to help the lender minimize the cost by absorbing some percentage of it directly, and the borrower enjoys a palatable and affordable interest rate. The effect of the mortgage points is usually mutually felt, and either the borrower or the lender benefits in the long run.
Worth of mortgage points
The underlying value of the discount point is one percent of the value of the mortgage loan. In such a scenario, if the value of the mortgage is $1000000, then the discount points will be $1000. The worth of the points is, however, dependent on the lender. One discount rate point may reduce the worth of the mortgage loan by a quarter or eighth percent.
Break-even point of mortgage points
The benefit of the mortgage points is felt based on how long the borrower stays in the house. If the borrower decides to leave the house after less than ten years, then the breakeven point will not have been attained and may not enjoy the impact of the mortgage discount points. The lender benefits more in this case. However, after the breakeven point, the borrower saves at least 4cpercent of the mortgage loan in the long run and the discount points cover it. The value of the discount points can be calculated using the mortgage points calculator.
Advantages and disadvantages of discount points
The bottom-line impact of the mortgage points is that they make it easier to afford the payments. The borrower will require a lower monthly payment, which will result in high cash flow and higher chances of qualifying for a better loan.
The borrower also enjoys long term savings when they stay in the hired homes past the break-even point. They also help in reducing the tax effect.
The points may also be harmful in that one needs more cash in the closing, and must be in the long for a long duration of time if they have to enjoy the break-even point. One may also get ripped off unknowingly.
The mortgage points can be a win to the borrower and may end up owning a home in the long run. It only demands a quick calculation before committing to the loan.