A “mortgage point” is equal to 1 percent of the loan amount, and is sometimes paid to obtain a lower interest rate on a home loan. Orlando mortgage borrowers can also sometimes choose to take a slightly higher rate and receive a credit from the mortgage company to cover some or all of the closing costs on the loan. It can be a tough decision whether to pay points or “buy down” the rate on a home loan. Ask yourself the following 5 questions to help sort through some of the confusion:
1) How long do I plan to own this home?
The longer you keep the mortgage the longer you will have to take advantage of the lower rate. If you sell or refinance a year or two down the road the lower rate will most likely not have generated significant savings.
2) Can I afford the additional up front costs?
Be sure you can cover your down payment, closing costs, and maintain the required reserves, or savings, needed to qualify for your loan before you consider paying points. When buying a new home it’s also a good idea to have a moving fund set aside for moving expenses and purchasing additional items you might not realize you need until you’re in the home.
3) Who is paying the closing costs?
If you are moving for work and your employer is paying your closing costs as part of a relocation package, or the seller of the home you are purchasing has offered to cover the closing costs, buying down the mortgage rate can be an excellent way to take advantage of the funds at your disposal. In both cases the amount is generally limited to a percentage of the loan amount, so you will want to be sure that the other necessary closing costs are paid for, and then any remaining amount may be able to go towards mortgage points. Check to make sure that discount points are an allowable use of the relocation assistance or seller paid closing costs.
Whether or not to pay points often comes down to running the numbers. Your Orlando mortgage professional can help you calculate how many months it would take to break even when accounting for the additional up front costs. You also may want to ask a tax professional about the tax implications of paying points or additional interest as part of your monthly payment.