Toronto Term Life Insurance: Understanding Points
Discount points are not an easy topic for many new homebuyers. It is a simple enough idea: in order to reduce the interest on your loan, you pay your bank some cash upfront as an incentive to lower the rate. When the rate is less, so will the monthly loan payment.
One point is a cost equivalent to 1% of the total amount of the mortgage. If you are obtaining a $200,000 loan, one point would be $2,000 at closing. A borrower has the choice of paying one or more points on the loan.
The original interest rate on the loan will still be predicated on the credit score of the borrower, but paying points will bring that original rate down. For example, if the original rate quote is 6%, according to your credit score, ask how much it will be if you are willing to pay any points. A general rule, but one that changes from bank to bank, is that one point will lower the loan rate .25% on a fixed rate loan and .375% on an adjustable rate loan. In the case of your $200,000 mortgage that you are willing to pay $2,000 for one point, your loan would then be reduced to 5.75% for a fixed rate loan and 5.625% for an adjustable rate loan.
Most banks will quote mortgage interest rates with optional points along with them. For example, the lender may list the rate as 6%, no points, 5.75%, one point, 5.5%, two points, etc. Then the quote would show 7% with the pertinent reductions. This is what makes it important that a borrower know what the point system means.
The monthly loan payment is lowered with each lowering of the rate; clearly a mortgage with a rate of 5.75% is going to be cheaper than a loan with a 6% rate. This sounds like it would always be a good investment, but you have to keep in mind that you are really paying interest up front. This means that if you do not have that mortgage for a long time, you will have prepaid this interest for no reason. Paying points is only worthwhile for those who plan on holding the mortgage for quite a while.
Points are often used as a sales gimic, since homeowners will have a lower payment and will pay more for the house. This is why you may see homes advertised with a notice that the seller is willing to pay points. But keep in mind that this may increase the price of the house by the amount of the points.
It is important to note that there is absolutely no obligation on the part of the borrower to pay points. It is a completely voluntary decision based on the borrower's analysis of the costs involved.
One point is a cost equivalent to 1% of the total amount of the mortgage. If you are obtaining a $200,000 loan, one point would be $2,000 at closing. A borrower has the choice of paying one or more points on the loan.
The original interest rate on the loan will still be predicated on the credit score of the borrower, but paying points will bring that original rate down. For example, if the original rate quote is 6%, according to your credit score, ask how much it will be if you are willing to pay any points. A general rule, but one that changes from bank to bank, is that one point will lower the loan rate .25% on a fixed rate loan and .375% on an adjustable rate loan. In the case of your $200,000 mortgage that you are willing to pay $2,000 for one point, your loan would then be reduced to 5.75% for a fixed rate loan and 5.625% for an adjustable rate loan.
Most banks will quote mortgage interest rates with optional points along with them. For example, the lender may list the rate as 6%, no points, 5.75%, one point, 5.5%, two points, etc. Then the quote would show 7% with the pertinent reductions. This is what makes it important that a borrower know what the point system means.
The monthly loan payment is lowered with each lowering of the rate; clearly a mortgage with a rate of 5.75% is going to be cheaper than a loan with a 6% rate. This sounds like it would always be a good investment, but you have to keep in mind that you are really paying interest up front. This means that if you do not have that mortgage for a long time, you will have prepaid this interest for no reason. Paying points is only worthwhile for those who plan on holding the mortgage for quite a while.
Points are often used as a sales gimic, since homeowners will have a lower payment and will pay more for the house. This is why you may see homes advertised with a notice that the seller is willing to pay points. But keep in mind that this may increase the price of the house by the amount of the points.
It is important to note that there is absolutely no obligation on the part of the borrower to pay points. It is a completely voluntary decision based on the borrower's analysis of the costs involved.
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