You read about mortgage loans, mortgage rates – unsure of what they are? Well, in this article, you will learn about mortgages, discount points and much more in simple terms!
What’s a mortgage to start off with?
Also commonly understood as a loan, a mortgage is used to purchase a home or other forms of real estate – it could even be a plot of land. The borrower will pay the money back through regular payments each month (which are divided into principal and interest). The property that you purchase becomes the collateral to secure the loan.
But let’s face it. In the world of real estate, there are plenty of complicated jargons that are used – HELOC, PMI, debt to income, APR, bridge loans and so on.
Quick note on HELOC: A home equity line of credit is secured by your home, giving you a revolving credit line to use for bigger expenses such as credit cards. HELOC(s) have a lower rate of interest.
So what’s a discount point?
Mortgage points are sometimes referred to as ‘discount points’.
A mortgage point is a prepaid discount point – a one time fee that you pay to lower the rate of interest when you purchase a home or a refinance.
One discount point costs one percent of the home loan.
For example, if the mortgage loan you take is $300,00, the discount point is $3000. When you buy a discount point, you will prepay the interest for a small monthly payment.
Quick note: There’s a possibility that you can buy fractional discount points and multiple discount points. The more points you buy, the more the interest rate will reduce.
How do mortgage points work?
Every mortgage point you purchase will reduce the interest rate by a set percentage point. Usually, the discount will vary from lender to lender. Mortgage lenders tend to cap the number of points that can be bought.
The points are paid for either at the closing or the rolling out of the loan. The lender will usually calculate the cost of the points purchased and add them into other closing costs.
Quick note: When you buy say, four mortgage points, your interest rate will be reduced by one percent. Keep in mind that it’s also the maximum number points any lender will allow you to buy.
Can mortgage rates change your APR?
APR – Annual percentage rate – this includes the mortgage’s interest rate plus any add on loan related fees that needs to be paid over the year.
So if you’ve purchased any discount points, it will reduce your APR as well.
In simple terms, how can mortgage points be beneficial?
- It helps you save money by paying extra money upfront (to see a huge amount of money in savings on your mortgage)
- By reducing the interest rate, it lowers your monthly payment.
At the end of the day, mortgage points (or discount points) can be useful, although it may seem to be an expensive affair at the beginning.
You’re paying a larger amount of money at the beginning only to make sure that your monthly payments are lowered with a lesser rate of interest.
Always consider reaching out to an expert when it comes to important financial decisions. You can reach out to mortgage advisors at Flyhomes who will guide you through your options.
After all, you’re buying a home. It should be a brilliant investment, and a brilliant experience. Trust Flyhomes to make it be both!
