Make Your Mortgage Points Carve Your Financial Success

March 15, 2009 by  
Filed under On Your Mortgage

If you are a first time buyer making your first tentative footsteps into the murky world of mortgage loans, it really pays to do your homework and learn about how the process works. This involves finding out what you must do to get the best possible loan rate and how your points can make or break your financial future..

The term “points” in mortgage lender jargon simply means the amount of fees paid to the lender which is interpreted in a points system. The interest is lowered in conjunction with the amount of points you pay for.

The secret of a long-term reasonably low-cost payment plan involves making the highest initial payment that you can afford. If you have the money to pay upfront, you can see it as an investment for your future. Sure, there may be other needs to be met if you are buying your first home, but they can be met slowly and with time. Once you have secured your affordable mortgage plan, you can feel comfortable in the knowledge that you monthly wage will not be eaten up by monthly repayments.

There are varying types of points, some of which are worth more to in terms of lowering interest rates. There is usually a charge of one point for the initial loan fee with more points added for loans which have a smaller interest rate than the market rate at that time. By paying the lender a cash payment up front you will receive a lower interest rate. Look around using newspapers or the internet to find out the current interest rate in conjunction with points.

In simple terms one point equates to one per cent of the loan so if you are borrowing 80,000, one point would equal $800. By paying more points you will reduce the overall interest.

There are other factors involved in the usefulness of you paying the points, such as how long you will be staying in the house. If you intend to live there for many years, you will reap the benefits of your initially paid points. Over five years is usually a good estimate for getting returns on your initial investment. If you do not intend to stay in the property for more than a couple of years, it might not affect you too much if you do not have the money to pay for points at the start.

You can ask your lender for an idea of roughly when the breaking even point would be. If you do have some extra cash at your disposal, putting it into the cost of you loan is a smart move and you will constantly be saving money throughout the term of your contract.