Points associated with a mortgage are difficult to understand. Unfortunately, not understanding could mean paying thousands of dollars that could be used better elsewhere in the process. Keep in mind that there are situations when points are helpful but the key is to understand what they are, as well as when they are and are not needed.
Think of points this way – they are dollars paid as percentages on your mortgage loan. Typically, points help to secure lower interest. Keep in mind that if you pay money upfront, points work by letting you pay a lesser amount monthly. However, you need to know if the points will help you or hurt you. Each point is 1% of the amount of the mortgage. As an example, if you had secured a mortgage for $200,000, the point would be 1% or $2,000.
It is important when you begin the process of shopping for loan rates that you look at all your options and then, compare them with points and without points. In addition, you need to understand that while you might be required to pay just one point, you could pay three to five. In fact, some companies will go as far as requiring up to 10 points for people with poor credit, which is unfortunately.
The key advantage of paying points is that you have the opportunity to secure lower interest rate for your loan. Obviously, the lower the interest rate, the lower your monthly mortgage payment and overall cost of the house. Now, depending on your situation, you may find yourself in a position of needing a low mortgage payment. If this is true, then you could pay points to help reduce the rates, thus the payment.
You may also find that by paying points, you get another benefit of a tax break. For this, you would need to talk to a tax advisor or check the current rules on home mortgage points. Just remember that if you can afford to pay this upfront money in the form of points, its overall worth needs to be weighed. For this, start by determining the number of points you can afford to pay. Then, determine the amount of savings you would get. Finally, determine if this savings is good for your situation or not.