Here's how to know when and if you pay points
Making the wrong decision with their mortgage financing could end up costing you thousands of dollars in unnecessary interest fees. So, taking some time to understand the nuances of different loan terms, including rates and points can result in significant savings to you during the term of your loan.
There are two kinds of "points" that the lender can refer to when discussing loan program rates and fees. One type of item is "discount points" and other point is the "point source". These two types of points are two entirely different purposes, but are similar in one respect: in both cases the point is equal to one percent of the loan amount. We will focus on discount points in this debate, but it is important that you understand the difference between these two types of "points ".
of the original point of the fees charged by the lender to originate loans (which includes taking requests, collecting the necessary supporting documents, processing loans, etc.) and a portion in which the lender realize a profit on the loan (the lender makes a profit additional funds , but this is beyond the scope of this report). You should always try to negotiate the lowest possible score for loan approval.
discount point is essentially the present value of the interest to be earned over time by the lender. It's a little confusing, but you can easily reduce your interest rate on the loan the lender to pay discount points in advance. Discount points are generally non-negotiable in relation to a particular interest stopu.Sljedeći example may help your understanding.
The more you know about the discount points better
I hope the following example will help you to quickly determine the best discount points to the interest rate for you, how many points you pay, and what formula is best for you.
If a lender gives you several options of interest rates and price points, you must calculate and analyze the financial consequences of each, so you can ultimately structure "lowest total cost" mortgage for yourself. For our example, suppose that you were considering two loans. Both are for $ 250,000, both of which are amortized over 30 years with fixed interest rates. Remember that one discount point is 1% of the loan amount:
Option # 1: a loan that the lender offers you is 5.5% with 0 discount points ($ 250,000 X 0.0% = $ 0.00).
Option # 2: other loan that the lender is offering 5.0%, but at the price of 2 discount points ($ 250,000 x 2.0% = $ 5,000 ) [. [/ P>
the primary factor that will determine which loan option is better for you (with the lowest total cost) is how long you expect to keep the loan. So the first thing you need to think about how long you will live in that kući.Prosječna homeowner uses between 5.5 and 7 years in his home before the sale for any reason.
Thus, for example, say you plan to live in the house for five years. Here's how to determine which loan option is better because it will result in the lowest total cost over 5 years.
Here is how we compute it. First of all you need to calculate a loan payment (principal and interest only) loans. For a $ 250,000 loan at 5.5% interest monthly payment is $ 1,418.29, for the same loan amount to 5.0% of the monthly payment is $ 1,340.75.
1 Multiply each payment times 12 (months)
$ 1,418.29 X 12 = $ 17.019 (the total loan cost / year)
$ 1,340.75 X 12 = $ 16.089 (the total loan cost / year)
2 Subtract the smaller from the larger
$ 17,019 - $ 16.089 = $ 930 (total payment of the difference between 5.0% and 5.5% loan credit)
$ 17,019 - $ 16.089 = $ 930 (total payment of the difference between 5.0% and 5.5% loan credit)
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$ 5,000 (price points to 2.0% x $ 250,000) / $ 930 = 5.38 years
In this example, if you stay in your home for only five years, you will not recoup the extra cost of discount points you paid in advance with a lower payment lower interest stopu.Break-even point in this example is about 5 years and 5 months. So, your best bet would be to choose the loan option # 1
If, however, intend to keep your home over 5 years and 5 months, you'd be better off without the loan option # 2 (long-term savings in interest rates will exceed the amount you paid in points - not taking into account the time value of money ).
If, however, intend to keep your home over 5 years and 5 months, you'd be better off without the loan option # 2 (long-term savings in interest rates will exceed the amount you paid in points - not taking into account the time value of money ).
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I hope this helps you see how important it is to understand the important details of your home financing, and how important it is to shop for the best rates, terms and points. If you are lucky enough to work with honest and ethical lender he or she will take the time to explain and show you how to choose the best and lowest total cost mortgage loan for you.