In this blog, we will discuss and cover understanding discount points and how discount points are used during the mortgage process to buy down mortgage rates. Understanding Discount Points in today’s mortgage market. Many of our readers are not aware of discount points and how they are used in today’s ever-changing mortgage climate.
Discount points have become part of the mortgage process in this rising-rate environment. Understanding discount points will make sense after looking at a few examples. In this blog, we will detail how discount points affect your mortgage. We will also discuss and cover Understanding discount points to buy down mortgage rates during the mortgage process.
What Are Discount Points?
What is a discount point? A discount point can be defined as an upfront fee paid directly to the lender in exchange for a reduced interest rate. Sometimes these are referred to as mortgage points, points, one discount point is equal to 1% of the loan amount. So, for a $200,000 loan, 1 discount point would be $2,000. The common misconception is that one point pays down the rate of 1%. That is 100%, not the case. It’s closer to1 Point to lowering your interest rate by .25% on average. Interest rates and investors have been all over the map with the economy gaining momentum, so this can change drastically depending on your situation.
Reducing Mortgage Rates With Discount Points
Mortgage discount points are the type of prepaid interest. When you pay for these points, you have reduced the interest rate of your mortgage loan, generally by 0.25 percent per point. You can frequently buy a bit of a point up to 3 points or conceivably more. By reducing the loan interest rate, you can also lower your yearly payment.
How Much Do Discount Points To Buy Down Mortgage Rates Cost?
Keep in mind that this requires an upfront payment. The amount of time you plan to live in a house, the further benefit you will get from paying for points. Mortgage discount points vs. APR Buying discount points on your mortgage is an effective way of compensating some of your interest, and looking at the periodic chance rate( APR) can help you compare loans with different rate and point combinations.
Understanding Discount Points?
How do points affect lower credit scores? Most borrowers believe discount points are extra fees by lenders to buy mortgage interest rates down. That is true for the most part. In today’s mortgage climate, many lower credit score borrowers must utilize discount points to obtain a mortgage. With the uptick in the United States economy we have seen interest rates rise. Investors are leery to raise the actual interest rate too far. Many lenders are starting to charge discount points upfront to obtain interest rates for borrowers with lower credit scores.
What Are Original Points In a Mortgage?
Mortgage original points are another type of mortgage point. They’re fees paid to lenders to appear, review and reuse the loan. Original points generally bring 1 percent of the total mortgage. So, if a lender charges1.5 actual points on an a$250,000 mortgage, the borrower must pay$4,125. Original points differ from reduction points in that they don’t directly reduce the interest rate of the loan. Some lenders allow borrowers to get a loan with no or reduced ending costs or original points but compensate for that with advanced interest rates or any other fees.
Discount Points Can Be Paid With Sellers Concessions
Seller concessions can be used to help with buying down mortgage rates with buying discount points. Many of our clients have lower credit score profiles. This is not a problem. If you are required to utilize discount points to obtain a rate based on your credit score, it is a good idea to ask for seller credits when submitting your offer. Your realtor should know how to do this, or we can discuss the credits you will need to buy the home.
Using Seller Concessions To Pay Closing Costs on Home Purchase
Let’s face it, not everybody has extra money laying around. Many of our clients use FHA loans to buy their homes. FHA loans allow up to 6% of the purchase price for seller concessions. Within this 6%, you can cover most of your closing costs and any discount points associated with the loan. This is becoming more and more common in today’s housing market.
Buying Down Mortgage Rates With Discount Points
In this section, we will cover buying down mortgage rates with discount points. What are mortgage points? And how do they work? Mortgage points are the fees that a borrower pays a mortgage lender to trim the interest rate on a loan. Each point generally lowers the rate by 0.25 percent, so one point would lower a mortgage rate of 4 percent to3.75 percent for the life of the loan. How important each point lowers the rate varies among lenders, still.
How Much Lower Is The Rate With Discount Point Rate Buy Down
The rate-reducing power of mortgage points also depends on the type of mortgage loan and the overall interest rate. Borrowers can buy further than one point and indeed fragments of a point. A half-point on a $300,000 mortgage, for illustration, would bring $1,500 and lower the mortgage rate by about 0.125 percent. The points are paid at the ending and listed on the loan estimate document, which borrowers admit after they apply for a mortgage, and the ending exposure, which borrowers realize before the conclusion of the loan.
Discount Points On VA Loans
Understanding Discount Points On VA loans, Gustan Cho Associates also are experts and specializes in VA mortgages with no lender overlays. Many of our VA clients have credit scores below 580. In this case, the veteran usually needs to utilize discount points to enter into the mortgage.
The good news for our Military clients is, the VA put a maximum discount point cap of 2 points (or 2%of the loan amount). And if the investor is quoting rates with more than two points needed, the Veteran cannot pay the overage. This is something the lender must cover. Gustan Cho Associates has no lender overlays on VA loans. Gustan Cho Associates has the utmost respect for our service members and will usually eat that cost for our troops!
Mortgage Rate Buydown Buying Down With Discount Points
Make sure buying EXTRA points is going to save you money:
It is important to weigh out all of your options regarding discount points. If you have the extra funds to utilize them, you need to make sure they will actually save you money. Using the chart above, paying the rate down from 5.25% to 5.125% costs a difference of $189, and saves you $20 a month. This will start to be a good investment in just 10 months. Paying the rate down from 5.125% to 4.875% costs a difference of $763 and saves you $39 a month. This will save you money in just 20 months!
How Long Does It Take The Costs Of Discount Points To Break-Even
Typically, if the discount points do not start to pay for themselves within five years, it’s not a good idea. The average American is on a home loan for just five and a half years. Around 5 and a half years is when Americans either sell their house or complete a refinance. We do not want to leave any money on the table. Please reach out to the expert Mike Gracz at (800) 900-8569 for more information on discount points and when to use them.
Tax Benefits On Discount Points
When utilizing discount points it is important to remember this cost is tax-deductible for primary residences. There are a few basic rules that apply before you can write off this cost. It must be in your primary residence. The points charged must be common in your area. The points must be in an amount common in your area.
The discount points are listed on the settlement statement at closing. Gustan Cho Associates are MORTGAGE EXPERTS, not accounting experts. We recommend Consulting a CPA for any tax-related questions. For more information on discount points and tax deductions, see the IRS WEBSITE on this topic.
Should You Buy Down Mortgage Rate With Discount Points?
You can profit from mortgage points if you plan on keeping your home long enough to neutralize the cost of buying them. Calculate the amount of time it will take you to make your profit back compared to how long you plan to enjoy the home to determine if you should buy mortgage points.
Calculating Your Savings From Discount Points
Before you decide to purchase a mortgage point, do the calculation to make sure that the points you’re considering buying will be worth it in the end. How long you plan to keep the house will play a big part in whether or not you get your plutocrat’s worth. Still, you’ll probably see a return in savings, If you intend to keep this house for the long term and plan to make 30 times your worth of payments. On the other hand, if you vend the home many times, you may not recoup your costs.
Qualifying For Mortgage With Lender With No Overlays
We pride ourselves on offering top-notch customer service. We will spend the time to educate you on all aspects of your loan, including discount points. We want to make sure where you are getting the best deal available to you. Gustan Cho Associates are 5-star national direct lenders with no overlays on government and conventional loans. Please reach out to us for a competitive rate quote or any general questions you may have. The team at Gustan Cho Associates may be contacted seven days a week, mornings, evenings, weekends, and holidays. Your questions can be sent to email@example.com or you can call in directly at (800) 900-8569.