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Mortgage Calculators and Figuring Discount Points
By Gerry Lewis
Points are deductible on your Schedule A, 1040 IRS return. That's good, if you paid them and know what they are. As always, there's something more to learn.
A discount point is an additional fee you pay to your mortgage lender in return for a reduced interest rate. What this means in real terms on the cost of your loan is best worked out with a mortgage calculator - in particular, a mortgage points calculator.
Generally one discount point is the equivalent of 1% of your total mortgage. This translates to a 0.125% on the agreed interest rate. In other words, you are paying a small amount of your overall interest in advance. This payment is made upon closing the mortgage, with your mortgage lender setting the cost of the discount point.
Although it is your lender who sets the value of the discount prices, you can do some work in advance by using a mortgage calculator to see what difference the points will make to your monthly payments. There is less advantage to buying additional discount points if you do not intend to live in the property for at least the greater part of the mortgage period. So, they are not always a good thing. Using a mortgage points calculator you can input various "years in home" figures to see how it affects the overall financing of your home with and without discount points.
Use the mortgage calculator to work out each of the options that your lender quotes you. Some mortgage lenders will allow 0-2 discount points, with variations for different mortgage terms, but other lenders will allow more discount points up to a set maximum. What you want to avoid is being in either a break-even or paying more than you would without the discount points.
To find your break-even point, use a mortgage calculator to calculate the monthly payment with no discount points at the stated interest rate. Then calculate the payment as it would be if you paid for discount points. Take the lower total from the higher total to determine how much you can save in a month. Finally divide the cost of the discount points by the monthly amount saved. This will give the amount of months you will have to keep the property to break even on paying for the discount points. If you don't intend to keep it that long, then discount points are not worth considering.
If you are buying your home as a short-term investment, then discount points are probably not going to benefit you. But if you are purchasing your lifetime dream home, then use a mortgage calculator to determine how many bonus points will give you the best possible monthly payment.
Stay awake when your lender starts talking. Or at least get it in writing before you sign. Then take advantage on the online mortgage calculators to see if the rates and fees and points they want to charge are something you can live with.
About the Author
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Mortgage Calculators can be an invaluable tool when assessing the viability of a mortgage. Get all the latest advice and information at:-
http://www.HomeBuyFinance.com
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