Mortgages Points And Interest Rates Go Hand In Hand

Mortgages – Points and Interest Rates Go Hand in​ Hand
When it​ comes to​ mortgages,​ many people tend to​ look at​ points and interest rates as​ to​ separate issues .​
In fact,​ they can almost always be used as​ leverage against each other .​
Points and Interest Rates
Two critical components of​ a​ home loan are the​ interest rate and points charged at​ the​ outset .​
The interest rate is​ simply the​ cost of​ borrowing the​ money and applies to​ the​ total amount borrowed,​ to​ wit,​ six percent for example .​
The points on​ a​ home loan are an​ up-front fee that equates to​ a​ percentage of​ the​ loan .​
For instance,​ one point equates to​ an​ up-front fee equal to​ one percent of​ the​ total loan value .​
Paying one point on​ a​ $300,​000 loan would equate to​ a​ fee of​ $3,​000 .​
Many people jump to​ the​ conclusion that points are bad and should be avoided at​ all costs .​
While this may seem like common sense,​ it​ is​ not true in​ all situations .​
From the​ lender’s view point,​ points and interest rates work hand in​ hand .​
If you​ have a​ unique cash situation,​ you​ may be able to​ save a​ ton of​ interest over the​ life of​ a​ loan by paying increased points at​ the​ outset of​ the​ loan .​
Generally,​ the​ more you​ pay in​ points,​ the​ lower the​ interest rate on​ the​ loan .​
If you​ intend to​ hold onto your property for a​ long time,​ paying maximum points on​ the​ mortgage makes sense if​ you​ have the​ cash .​
The reason for this is​ the​ money spent on​ the​ points will be easily recovered if​ you​ can reduce the​ interest rate by a​ full percentage point or​ more .​
Saving even one percent on​ an​ interest rate will save you​ tens of​ thousands of​ dollars in​ interest payments on​ a​ thirty year loan .​
In such a​ situation,​ it​ makes sense to​ pay $6,​000 or​ so in​ point to​ save $30,​000 or​ $40,​000 in​ future interest payments .​
Of course,​ you​ have to​ have the​ cash available to​ do it .​
If you​ intend to​ hold onto a​ home for a​ short period of​ time,​ the​ same issues need to​ be considered .​
In this case,​ however,​ you​ will not have time to​ recover any money paid in​ points because you​ intend to​ sell in​ a​ few years .​
As a​ result,​ you​ want to​ shop for a​ loan that requires no points be paid .​
Yes,​ you​ will have to​ accept a​ higher interest rate on​ the​ loan,​ but this should be somewhat immaterial if​ you​ are only buying for the​ short term .​
The bigger point is​ points and interest rates should be viewed as​ connected parts of​ a​ mortgage .​
As a​ borrower,​ you​ can negotiate with lenders to​ raise or​ lower either one by tweaking the​ other.
Mortgages Points And Interest Rates Go Hand In Hand Mortgages Points And Interest Rates Go Hand In Hand Reviewed by Henda Yesti on July 03, 2018 Rating: 5

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