Making Use Of Mortgage Points

By: Peter Kenny

What makes mortgage points important? They can save you a substantial amount of money. Therefore, it is in your interest to know what exactly they are and how they function. Since your mortgage's interest rate determines what your monthly payments will be, you could be identified by using 1% of your mortgage loan amount as a primary factor. A mortgage point is a unit that describes exactly how expensive or inexpensive your mortgage loan costs will be as well as any variations in this rate; all are compiled and calculated to define mortgage points.

Types Of Mortgage Points

Bear in mind, also, that the interest rate that you are charged for the loan may be further divided into smaller units in order to determine why a particular increase or decrease in the rate happens. This means that whenever a variable lowers the interest rate by even one point, it is said to reduce the overall risk associated with the transaction. Yet, when a variable raises the interest rate by one point, it is identified as the source of a risk.

Certain kinds of mortgage points can actually be purchased. Essentially, this means that you would be paying a down payment on your loan, which will in turn lower the interest rate you will have to pay on your mortgage loan. These mortgage points are known as discount points. The cost of particular discount points will vary according to the loan amount that was established by the borrower in the initial loan application process. (A mortgage point equals 1% of the total loan amount.)

The Limits and Flexibility of Mortgage Points

Another noticeable fact is that mortgage points can be rather flexible in their application. For instance, mortgage discount points can typically be obtained though paying an amount in advance that is the equivalent to 1% of the total amount of the loan. Another point type, origination points, is charged to pay for the administrative costs, closing fees, and other fees and costs. These are the costs placed on the loan by the lender.

Despite the flexibility of mortgage points, there are definite limits as well, and they cannot be exceeded. An example would be your interest rate, which cannot be lowered or raised beyond what are termed "reasonable" boundaries. This limit is determined on factors like the type of loan you have as well as the lender. Any mortgage point you obtain can be divided into fractions. Different variables may reduce or increase the interest rate by as little as half a point or a quarter of a point. For the borrower this means that you can buy a half a mortgage point so you can reduce your loan's interest rate.

Obtaining Discount Points

There are definite benefits to obtaining discount points. Many of these advantages vary and may depend largely upon the length of your loan repayment cycle, as well as any other factors relating to the property. For those who are going to keep the home for a long time, getting discount points is the way to go since the amounts can be spread throughout your payments, making those monthly installments lower. Of course, if you aren't planning on keeping the property for the long-term duration, taking time to collect discount points may not be the right approach.

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