So you are looking to buy a new home and you are hearing about discount points. Or you already know something about discount points and you think you have the answer. Here is the mistake buyers often make is they base decisions on their past experience. They don’t realize how fluid the mortgage market is. The problem is more than likely their experience is take from their experience with very few real estate transactions. What you need to understand about the real estate industry is that there are no timeless universal correct answers.
The game of real estate changes dramatically year to year, month to month, and even week to week. This is why you cannot rely on your own experience of the past. You cannot rely on experience of others from their past. You need to educate yourself the best you can with current information and find a Realtor that is honest and actively selling houses every month that can help guide you.
Discount points are pre-paid interest that change the interest rate you pay over the term of the loan. Here is the question, “Are Discount Points a good Idea?”. Well it depends. First, let me tell you upfront I am writing this because Discount Points have become a much better idea in the past few months. Why? Well. It is all just math. How much is a Discount Point. One point is equal to 1% of the loan amount, so if you have one point on $150,000.00 then you will pay $1500.00 at closing. Take for example the following choice. One loan has one discount point and an interest rate of 5% and the other has no discount point and a 6% interest rate which one do you want? Well, let’s look at it.
You would calculate it this way. First you figure out the difference. With the loan up front you will pay $1500 at closing but your monthly payment will be $805.00(refer to chart from previous post). With no points you will not have the $1500.00 at closing but with your interest rate at 6% your monthly mortgage payment will be $899.00(refer to chart). So which is better? Well it depends on how long you will be living in your new home. With one you save $1500 but pay $94 more a month. A simple calculation 1500/94=15.96, shows that if you are going to be there for more than 16 months you will be saving quite a bit money with the first choice of the discount point. If you plan on moving in less than f16 months than you should choose the one with no points.
The difference a point makes in the actual interest rate will vary at different times. In the current market the above example is about right. You save a point on interest for every discount point. Three years ago it was more like you save 3/8 of a point on interest for every discount point. You can see the calculations would be very different.
This is just a very small part of understanding which is the best loan right now. So again I would recommend that you do lot’s of homework and find a knowledgable Realtor. Selecting the wrong loan could cost you thousands over the life of the loan.
Ask questions. Don’t be shy. Very few have a full understanding of all the complexities of the process. Even the veterans we see that think they have it all down usually only have a working knowledge of the surface.
Just between you and me. I think Lenders purposely try to make it complicated to make it easier to sell you a product that may be good for them but bad for you. Don’t let this happen. Knowledge is Power.
Joel Garcia
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