What Are Mortgage Loan Points?

Introduction

Most of the people in the United States own house as the most valuable asset. Some people take the loan for purchasing keeping the house as security while some people take a loan on an already purchased house in order to full fill their financial needs. What if someone told you that there is a provision through which you can get a discount on your interest rate by purchasing some points and your loan of decades will be eased. It is hard to believe but there is a provision that can be availed at almost all financial institutions in the United States. Complete knowledge about in and out of the mortgage loan and points is very important in order to make the right investment.

What Is Mortgage?

It is a debt instrument available from all financial institutions and is used by individuals and business houses in order to purchase a larger property by paying a little amount of the total value and the rest of the money is given by the financial institutions in the form of loan keeping the land or the property to be purchased as mortgage. Another form of mortgage or mortgage loan is keeping the already bought land or property as security against the loan taken from financial institutions. The mortgage value is decided after analyzing the locality and build quality of the house.

The buyer agrees to pay a signing amount at the time of getting the mortgage loan which is usually called down payment. The repayment of the mortgage is done in the form of easy installments and the term of repayment may vary from years to decades. Since it is a secured form of loan the rate of interest to be charged on the loan amount is also disclosed in the mortgage agreement and is usually less than that charged in personal loans. This whole process of repayment of the mortgage loan is known as amortization.

In And Out Of Mortgage Points

The mortgage points can be bought in order to lower the interest rate of the mortgage loan which will not only reduce your monthly installment but will also ease the repayment process as the assets are put on the right use. The algebra of the mortgage points is quite simple. You are required to pay generally one percent of the mortgage in order to get one mortgage point. For a mortgage of 10,000 dollars, you need to pay 100 dollars in order to obtain one point. It is not important to pay for the round figures of the mortgage point, you can ask for a decimal figure or any fraction depending upon the money you are willing to pay.

Types Of Mortgage Points

Discount Points

If you wish to lower the interest rate on the mortgage loan by a pre-paying a certain amount, you can ask the bank to provide you discount points. The amount of rate to be lowered depends upon the choice of the borrower. The more points you purchase, lower the interest rate will be. It is not necessary that all the financial institutions lower the interest rate by the same amount. It varies from company to company and is affected by market trends. Generally, the interest rate is lowered by 0.125 percent to 0.25 percent. Use the mortgage calculators available from various companies in order to know the points required to lower the installment to an optimum value.

Origination Points

If you wish to extend the term of repayment of the mortgage loan the discount points won’t benefit you. Financial institutions offer the borrowers with the origination points that are meant to be paid to the lenders in order to ease the terms of the mortgage, may it be an evaluation, processing or the approval of the loan. Using these points the borrower can ask the lender to extend the period of the repayment. Just like discount points, the origination points are also tax deductible. It is important to note that the cost of the origination points is not tax deductible for the closing cost and are used only for the mortgage.

Right Time to Buy Points

It is always worth to buy the points at the right time in order to extract the best benefits out of it. There is no fixed definition of the right time, it varies from person to person and is largely affected by so many factors. Ask yourself two questions before making any decision. The first factor is the length of the term you wish to stay at home and the second factor is the amount of money you have to spend at closing. For those willing to stay for the long term at home, buying the discount point will lower your interest rate and help you. Those willing to start another mortgage loan there is no logic at buying the mortgage points.

Conclusion

It is always best to make use of the fixed assets like a house in order to get a mortgage loan from the banks and invest that money in order to build your asset column which will benefit you as an income source. Provisions like mortgage points are of great benefit in order to ease the terms of repayment of the mortgage, whether it be lowering the interest rate or extending the period of the repayment. Explore all the options available and consider all the factors before making any decision. Wait for the right time and situation to make the best use of your funds.

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