"Point" Yourself in the Right Mortgage Direction

By JJ Singh
Loan Page Columnist

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When closing the deal on your new home loan, you'll probably encounter a laundry list of associated fees and costly terms. But while fees are self explanatory, points are not so obvious.

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What are Mortgage Points?

Mortgage points are additional fees added on to the cost of your new home loan. Points are expressed as a percentage of your home loan. For example, on a $100,000 loan, four points would cost you four thousand dollars.

Points are not necessarily included as a way for lenders to make more money. More accurately, they act as an option for you to choose whether you'd like to prepay interest or pay more during the life of the loan.

To Point or Not to Point

Lower points are always better right? Not necessarily. If you opt for fewer points up front, your long-term interest rate will likely be higher.

You should choose higher points when you:

  • » Plan to live in your home for a long time.
  • » Have enough cash to pay into your home.
  • » Want less risk.

You should choose lower points if you:

  • » Want to sell the house quickly.
  • » Invest the money you would have spent on points in a more profitable venture.
  • » Cannot afford paying more at the beginning.

When deciding how best to structure your loan, it is imperative to first evaluate your needs. If you are looking to aggressively leverage your home to return a hefty profit, you should probably choose lower points. Higher points are for the more conservative people who intend to settle down for many years.

After considering your financial situation and your goals, you'll be pointed in the right direction, so to speak, to find the right mortgage.

Sources:

Understanding Private Mortgage Insurance

About the Author

JJ Singh is a loan consultant who has mortgaged his life away to the micro finance industry in New York City. He holds a Bachelor in Economics Degree from the University of Virginia.


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