Plug in Points to See How Your Financing Will Pay Off

The home mortgage loan sector is one of the most innovative financial markets. When you consider mortgage points it adds confusion to an already complicated process. However, most buyers do not understand the concept of points and they do not ask for help or clarification to learn about it. They become overwhelmed and have to depend on the mercy of the lender's offer.

The concept is quite simple. Mortgage points are fees paid to a lender for a loan. Shortly the points are usually linked to interest rates with the more points you pay for, the lower the interest rate. Another way to view them would be as pre-paid fees. If you pay points now you will save money in interest payments later.

If you have the cash on hand to pay points and you still cannot decide if you should pay them to get a lower interest rate ask yourself what you would do with the money if not spent on points. If you are buying a home you probably have many needs for the extra money but do not be short-sighted. Invest for the long term.

Most lenders usually charge one point for the loan origination fee and additional points on loans that have interest rates under the current market rate. The lender gets some money up front in exchange for a lower interest rate. It is a win situation for both parties. You can check the newspaper or the Internet for current rates and points being offered and their combinations, which are many and negotiable.

Some mortgage points will reduce the interest rate and some will not. Discount points are based on how much money you borrow. One point equals 1% of the loan. For example, 1% of $100,000 would be $1,000. You can expect a reduction of about one quarter percent for each point paid. Paying points does not reduce the amount borrowed but how much you will be paying back. So, paying points depends on a lot of factors.

If you do not have the cash to pay points then it is a moot point. (No pun intended). The main thing to consider is how long you plan to keep your home. In other words, will you keep the home past the break-even point? That is when your accumulated monthly savings exceed what you have paid in points to get the interest rate down.

Paying points is probably a good investment if you plan to keep the home five years or more. Points can be considered an investment when it continuously yields a savings the longer you stay in the home.

A chart can be prepared to show you the options and when the break-even point occurs. Ask the lender to quote points in dollar amounts so you can easily see how much you are spending.

It is thought the mortgage point system is used only in the United States. That is probably a plus for the creators of our financial system which enables more families to purchase a home who otherwise would not qualify.

This article was written by Arek Zbikowski. For more tips and information on saving money with mortgage points feel free to visit my site at http://www.atozmortgageguide.com