| |
Should I Pay Points?
By Max Hunter
To pay points or not to pay points, that is the question. Before answering the question it is first important to understand what exactly points are. A point represents 1% of a home loan. For example, a $100,000 home loan would equate to each point being $1,000. A home loan of $150,000 would equate to each point being $1,500. This is important to understand.
Generally speaking you will be faced with the prospect of paying points at two critical junctures in the home buying process. The first time you may be faced with this decision is when you need to decide if you want to pay point(s) to lock-in your interest rate. You may pay a fraction of a point, one point or perhaps more than one point. When you are approved for a home loan you will be told an interest rate that you qualify for. That interest rate and your qualification will be for a specific period of time. It may be 30 days, 45 days, or 60 days, or any number of days in between.
Your loan officer may then tell you that you can lock-in your rate for a specified period of time. A failure to lock-in the interest rate may result in a higher interest rate when you close the loan if the closing date is after the specified duration of your mortgage commitment. Your loan officer can offer to extend that interest rate based on your paying point(s). It is important to have a general sense of what is happening with interest rates in order to make the right decision. For example, if interest rates have been raising slowly over a period of time you may decide that it is worth paying the point(s) in order to lock-in your interest rate.
Your loan officer should be able to give you their best guess as to what interest rates and what your rate may be if you do not pay to lock-in your rate. You can then calculate the amount of money this will cost you over a year or more period of time. A simple mathematic analysis will determine if you are saving more money by paying the point(s) or not. Clearly you may not decide to lock-in if you believe the amount of money you will save is negligible compared to the cost of the lock-in.
The second time you will be faced with this decision is when you are given your overall loan package details. Generally speaking you will likely be presented with the option of paying point(s) to reduce your interest rate. So, for example, you may be told that your interest rate will be 6% with no points, however, it can be reduced to 5.75% if you pay one point or 5.5% if you pay two points. Again, mathematics will help solve this dilemma.
You need to have a general understanding of how long you anticipate living in the home, or how long you will live in the home before refinancing. That is what you can refer to as the life expectancy of this particular mortgage package. Simply calculate the amount of your mortgage payments over that period of time at both interest rates. The difference saved is the important factor. If the amount saved is greater than the points you would pay to reduce the interest rate than you may consider paying the points to lower the rate. If the amount saved is smaller than the amount you pay in points than you may consider declining the offer.
The key to the decision is having a clear sense of what your plans in the home are, plans for possible refinancing, etc. Once you have this information in mind you will find that the decision as to whether or not to pay points will be clear.
About the Author
Max Hunter is the author of many credit related articles. If you are looking for help with Home Loans or any type of credit issue please visit us at http://www.homeloanave.com
Article Source: http://www.simplysearch4it.com/article/9801.html
| If you wish to add the above article to your website or newsletters then please include the "Article Source: http://www.simplysearch4it.com/article/9801.html" as shown above and make it hyperlinked. |
| Some other articles by Max Hunter | Credit Counseling Or Bankruptcy: Which Is Best For You?
People often get to a place where they simply can't pay their bills, especially in today's economy which is not particularly sympathetic toward the poor or even ...
Credit Reports And Credit Reporting Agencies
We all know that our financial transactions are reported to credit agencies that track how well and how quickly we pay our debts and ...
Mortgage Payments vs Rent Payments
There is an age-old debate on whether or not it makes more sense for people to rent or buy. Though it is hard to really understand why there is a debate at all. You ...
No Money Down Loans
You want to buy a home but you do not have money for a down payment or for closing costs? Well, just forget it. At least that is ...
Home Loans - Dispelling The Myth
You have undoubtedly heard a plethora of advice when you mentioned you were considering buying a home. Everyone probably had an opinion, they ...
Home Equity Loans - Friend Or Foe?
Home equity loans are advertised on the airways, newspapers, magazines and just about anywhere else a homeowner may see or ...
|
|
| |
|
|
|
