There’s so much to know when it comes to buying a home. As a first-time homebuyer, it can get a little overwhelming.
As you progress through the process, you may encounter terms you never heard of, including mortgage points.
If you’re eager to learn about everything that’s available in the home-buying toolbox, you’ll definitely want to hear more about mortgage points, which can save you money through reduced interest rates.
What is a mortgage point?
One point equals 1% of the loan amount. For a home that sells for $300,000, one point totals $3,000. Pretty easy, right?
Here’s what it means to you. Points can be applied toward securing a lower interest rate, which remain historically low. So, “purchasing” points for a discounted interest will produce even larger savings in the long-term.
But there’s something that works similarly that often is overlooked.
Lender credit option
Lenders offer what is called lender credit, a reverse form of purchasing mortgage points. Instead of paying an upfront cost for a point, you can choose to pay a higher interest rate over the life of the loan.
In exchange, the lender lowers the amount the applicant pays when it comes to closing on the deal.
What a mortgage point is not
The percentage used in calculating the cost is unrelated to the new interest rate. A purchase of one point does not equal a one-point reduction to the interest rate.
When are closing costs due?
The purchase of points is associated with the closing portion of the home-buying process.
The amount will be due at that time and will be based on the home’s price.
So, is this something for you? Your decision will depend on your budget and long-term plans. Keep in mind that a 0.25% difference may not seem like much now, but over the course of the loan it will add up to immense savings.
As you plan and budget for closing costs, it’s important to learn about every available tool so you can be in full control of your immediate and long-term goals.