How one can land an extra-low mortgage fee with the assistance of ‘factors’
How to get a particularly low mortgage rate with ‘Points’
Mortgage rates have fallen back to their all-time lows, and borrowers can get even steeper discounts by using so-called discount points. These are optional fees that you can pay the lender to lower your mortgage rate a little.
And that’s the catch.
“You have to be willing to pay for it,” said Nicole Rueth, production branch manager at Fairway Independent Mortgage Corp. in Englewood, Colorado. “You can put your rate in the 1’s or low 2’s, but how much are you willing to pay – and when doesn’t it make sense?”
Discount points do not benefit every mortgage buyer. So before you buy down your interest rate, you should know how points work and if they are worth it.
How do discount points work?
Mortgage points are one way to lower your interest rate. When you buy a point it usually costs 1% of the loan amount – so you would pay $ 2,000 to buy one point for a $ 200,000 mortgage. Typically, one point lowers your rate by 0.25%, so a rate would decrease from 3% to 2.75%.
But these are estimates. There is no set price for points and no set rules for how much they lower your price. Because of this, it’s important to “ask your lender about your options distribution,” says Rueth.
Get multiple price quotes and ask each lender how their points system works.
If you see spectacular mortgage rate anywhere, look carefully. The fine print might tell you that the award comes with points. For example, in the popular Freddie Mac Mortgage Rate Survey, 30-year loans averaging just 2.87% averages six-tenths of a point.
To get a droolable price, you may have to pay an additional fee.
All points should be listed on your loan estimate, an official document that the lender must present at least three days after applying for a mortgage. When you graduate, you pay points along with the other graduation costs.
How do I find out if points are worthwhile?
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The answer depends on whether you are holding the mortgage above your “break-even point”. That’s when the money you save on your monthly mortgage payments reaches the amount you paid for point purchases. After that time, you will start saving real money.
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If you think you could move or refinance your mortgage before you break even, you will lose money on the rebate points you paid.
To find your break-even point, open the calculator app on your phone or computer.
Let’s say you received an offer for a 30 year mortgage of $ 200,000 at a fixed 3% and your monthly payment without points is $ 975. You want to buy a mortgage point for 1% of the loan amount or $ 2,000. This will bring your interest rate down to 2.75% and your monthly payment to $ 954 – saving you $ 21 per month.
Divide the amount you paid for your point ($ 2,000) by the amount of your monthly savings ($ 21). The result is 95.24, which means it will take you 95 and a quarter months, or just under eight years, to break even.
When points make sense
If you plan to hold the mortgage for more than eight years, you will save money in the long run.
Discount points can be worthwhile if:
You plan to stay home after your break-even point. It can take several years to get back the money you paid for discount points. But if you’ve got your hands on an amazing rate and have no plans to move, then you will be ahead of the game.
You need help qualifying for the mortgage. When you apply for a mortgage, the lender calculates your “debt-to-income ratio” or DTI. This metric shows how much of your monthly income is used to pay off debt, including your mortgage. Too high a DTI can exclude you from the loan. But buying your mortgage rate can help you lower your monthly payment and meet the lender’s DTI requirements.
They don’t expect prices to drop any more. There is no point in paying money to lower your interest rate if mortgage rates continue to drop to new all-time lows. “People who cut their interest rate three months ago regret it today,” because interest rates fell shortly afterwards, says Rueth. But if you think interest rates are about to go up, then you might decide that lowering your interest rate is advisable.
But always look around and get detailed quotes from three to five lenders – or more. Because you may find that one lender has a no-point interest rate that is higher than another point’s interest rate.
Also pay attention to the comparison shop when buying or renewing your home insurance. It’s a great way to find the right coverage at the lowest price.
This article is for information only and is not intended as advice. It is provided without any guarantee.