WHAT ARE POINTS?
One of the questions homeowners always ask is “ Do I have to pay points”? Let's understand what points are. Points are pricing adjustments made to your loan to achieve not only a lower interest rate but also less money paid back over the life of the loan.
Points are voluntary and should be disclosed to you as an option, not a mandate. You should be aware that if you select not to pay the extra points, you will end up with a higher interest rate.
A pricing adjustment simply means that the lender will charge your loan an extra percentage for further reducing your interest rate. So for example, if your new mortgage loan amount is $200,000 an extra percentage point or 1% would add $2000 to your loan.
So instead of borrowing $200,000 without the point, you actually borrow $202,000, but at a lower interest rate. Although you are creating a higher loan amount by adding the extra point(s), the point will allow you to achieve less money paid back over the life of the loan.
Often times a smaller loan amount with a higher interest rate causes you to pay back more over the life of the loan, than if you took a higher loan amount (with points) at a lower interest rate. Adding the extra point may have brought your interest rate down by probably an eight to maybe a half of a percent.
A good loan representative will actually walk you through the math to show you whether adding the extra costs to the loan associated with the point(s) is worth the extra monthly savings. If the monthly savings with the added point(s) is relatively small, then it's probably best to just live with the slightly higher interest rate.
A loan representative stuck on selling you a rate will attempt to make the loan as sexy as possible. Therefore, beware that do not get sold an interest rate that simply doesn't benefit you.
In fact, an underwriter approving the loan can take the initiative and contact the borrower in a case where the benefit of paying points is not clear or whether the loan proposal doesn't meet the criteria for the net tangible benefit.
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