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Home Loan & Home Mortgage Article Series
Negotiate Mortgage Points
Before You Sign Anything
4 Points to Calculate
Are you getting ready to buy a new house? Curious about mortgage
points? Mortgage points are fees paid to a broker or lending
institution that are linked to your mortgage’s interest rate.
In general, the more points you pay, the lower your mortgage’s
fixed rate will be. Since the lender is receiving payment up
front in a lump sum, the fixed interest rate you pay on your
mortgage can be lowered slightly.
One
point equals approximately 1 percent of the amount of the
loan. For example, for a loan of $200,000, one mortgage
point would equal $2,000. Mortgage points are usually paid
at closing, in cash. Some buyers borrow money in order to pay
points, though this will increase the closing costs and the
amount of the loan.
So how much do mortgage points save you in the long run? In
most cases, buying mortgage points will only lower your interest
rate slightly. Typically, each mortgage point you buy lowers
your interest rate by 0.125 percent. So if you have a 6.5 percent
rate, and you purchased one mortgage point, it would be lowered
to 6.375. You will need to use a mortgage calculator to see
how much you save each month. You should also calculate how
long it will take before you reach the ‘break even’ point.
The break even point is when you recover the cost of purchasing
the mortgage points. There are four steps in calculating the
break even point:
Calculate the amount of your monthly mortgage payment at the
normal interest rate.
Calculate how much your monthly mortgage payment would be
if you did purchase one mortgage point.
Subtract the lower payment (results from number 2) from the
higher payment (results of number 1).
Divide the amount of one mortgage point by the amount saved
each month (results to number 3). The result of this calculation
is the number of months needed in order to reach the break
even point.
In general, the simplest method in calculating whether you
should purchase mortgage points is to decide whether you can
afford to make the upfront payment required at closing. If
you are interested in purchasing mortgage points, but have
to struggle to find payment for them, perhaps they are not
the best option for you. Borrowing to pay for mortgage points
will not only increase the closing costs, but also the amount
of your loan.
You
should also keep your specific situation in mind when deciding whether to purchase mortgage points. Are you planning
on keeping this mortgage for a short time, or an indefinite
period? If you expect to keep your mortgage for a long time,
it may be a good idea to purchase mortgage points. The longer
you plan to stay in the same house, the more you’ll benefit
from the lower interest rate that buying mortgage points at
the time of purchase can allow you.
If you’re interested in purchasing mortgage points, be
prepared to negotiate before signing. But before you reach the negotiating
table, make sure you know what to expect as to the costs of
purchasing mortgage points. Check your local newspaper to research
current rates. This will give you a good idea of how much it
will cost to buy mortgage points.
One of the simplest ways to make purchasing mortgage points
relatively painless is to let the seller pay for a
portion of them. You will need to discuss the terms of your loan with
your broker or lending institution to see if this option is
available. If it’s allowable, you can negotiate with the seller
to see if they are willing to pay for a portion of your mortgage
points. The seller will likely ask to raise the price slightly,
but even so, you will be able to move into the house for less.
When speaking to your broker or lending institution, you should
ask for points to be quoted to you as a dollar amount, and
not as percentage points. This way you will have a clear idea
of how much you will be required to pay, if you do decide to
buy mortgage points. Having the points available as a dollar
amount will also make it easier to negotiate.
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