What Are Mortgage Points?

What are Points?

When shopping for a mortgage, many lenders will quote you rates with points or you can ask for a rate with points. Each point represents one percent (1%) of the amount you are borrowing. Generally, paying points should lower the interest rate on a loan. The more points you pay, the lower the interest rate should be. Lowering the rate reduces your monthly principal and interest payment.

Break Even “Points”

As a general rule of thumb, it takes approximately 5 years on a 30 year loan to recoup the cost of the points paid provided each point lowers your rate 1/4% as described above. If the drop in rate is not 1/4% for each point paid, the amount of time it takes to recoup the points is longer.

Points are normally a good option if you plan on being in the home for a period of time greater than the time it takes to recoup the costs of the points (break even).

To calculate the break even:

Calculate the Principal and Interest Payment on the Zero Point Loan Calculate the Principal and Interest Payment on the Point Loan Calculate the $ value of the Points Calculate a – b = the savings in your monthly payment Calculate ( d / c) / 12 = the number of years to recoup your points

Here’s an example:

You are purchasing or refinancing your home and borrowing $100,000. Your options are a 30 year loan at 8.00% with 0 points or 7.75% with 1 pt.

To calculate your “break even”:

Monthly principal and interest at 8.00% = $734 Monthly principal and interest at 7.75% = $716 Cost of points paid = $1,000 d) Monthly Savings ($734 – $716) = $18 / mo.

Calculate ($1,000 / $18) / 12 = 4.63 years to break even

There may also be some tax benefit to paying points.

Tax Deductibility of Points – Purchase versus Refinance

When purchasing a home, the points you pay are normally tax deductible in the year you pay them. This may shorten the break even point or number of years it takes to recoup the points considering the savings on your monthly mortgage payment and tax benefit derived.

When refinancing a home, the points you pay are normally amortized over the term of the loan when calculating any tax benefit. For example; paying $1,000 in points on a 15 year loan will give you a $66 tax benefit per year for 15 years ($1,000 / 15).

Always speak to an accountant regarding tax benefits and paying points on a mortgage loan. Your accountant can best advise you based on your particular tax status. Keep in mind, however, if it costs you $100 per month to save $75 in taxes, you are still $25 in the red!

Points and PMI

When the down payment on your loan requires PMI, we normally do not recommend points, however, the decision is purely financial on your part. Paying points may decrease your monthly payment, however, you will have less equity in your home. With less equity in your home, it will take you longer to reach the 20% equity level thereby allowing you to drop the PMI. This is also a consideration if you ever wish to refinance your home.

Do keep in mind the rate of PMI you pay goes down at the following down payment levels:
5% – 9.99% Down – Highest PMI Rate 10% – 14.99% Down – Mid Range PMI Rate 15% – 19.99% Down – Lowest PMI Rate

Unconventional No Down Payment Mortgage Loans

Unconventional no down payment mortgage loans are difficult to come by in the distressed home loan mortgage market we are experiencing. A tremendous number of no down payment mortgage loans with escalating ARM’s were made to people who should never have qualified for a loan in the first place.

When housing prices fall, as they did in last few years, people with unconventional no down payment mortgage loans found themselves upside down with respect to their mortgage. They ended up owing more on their mortgage than their home was worth. This precipitous fall in housing prices created huge numbers of foreclosures and people literally just walked away from their homes.

Because of the subprime meltdown there are very few conventional lenders willing to make no down payment mortgage loans at this time. However, there are still ways to buy a home without a down payment. They include: 1) Gifts and grants as down payments, 2) Programs available with FHA loans, 3) Rural housing mortgage loans and 4) VA home loans.

To get an unconventional no down payment mortgage loans with gifts and grants as down payments you need to find lenders who will allow this type of transaction to take place. Some conventional and sub-prime products allow for this type of contribution to count as your down payment and thus you are freed of making a down payment out of your pocket. Check with your mortgage broker to find out if they know of lenders who will accept this type down payment. American Family Funds is the administrator of the Dove Foundation, which makes grants for this purpose.

Federal Housing Administration (FHA) loans typically require a 3% down payment to qualify for their mortgage loans, however you can effectively get an unconventional no down payment mortgage loan buy having either a family member, relative, or a nonprofit organization gift you the 3% in cash. This money is then applied to the down payment. Traditionally gift money from a family member or relative has always been allowable by FHA. However, third-party nonprofit organization gifts were recently challenged by a lawsuit with HUD and a non-profit organization. HUD lost the lawsuit so third party nonprofits currently are still a source of legal funds for down payments.

The USDA rural development’s Guaranteed Rural Housing (GRH) loan program is available to individuals who live in a rural area whose income doesn’t exceed the moderate income limits for the area in which they live. If you have a steady income and a satisfactory credit history that would qualify you for conventional financing but don’t have money for a down payment, you can get no down payment mortgage loans with this program. The GRH insures the loan provided by a lender against loss in the event of default by the borrower.

Finally, Veterans Affairs (VA) home loans are a great source of no down payment mortgage loans for veterans of the United States Armed Forces and the National Guard. There is certain time in uniform requirements and discharge requirements necessary to be eligible for this type of loan but it is a great program. The VA guarantees repayment of the loan made by a private lender in case the borrower should happen to default. This allows lenders some latitude when taking into account a veteran’s credit score. A veteran need only show that he/she is able to make the payments on the property to qualify for the loan.

The influence of your credit score on the refinance rates

A good credit score can definitely help when you’re trying to refinance your mortgage. Refinancing’s benefits are numerous, and if you’re looking to lower your interest rate and monthly payment, a refinance is the quickest way to accomplish the goal. Your FICO credit score is a three-digit number that can range from 300-850. The FICO score is used to determine a person’s creditworthiness; a lower score indicates problems, and a higher score indicates a person’s wise use of credit. There are different factors that make up a score, such as debts, payment history, length of credit history, number of inquiries, and types of credit accounts.

A mortgage refinance involves an application for credit, along with a review of your financial situation and your credit history. Both of these elements are integral to the loan approval process- having a prior home loan doesn’t automatically mean that your refi will be approved. A good FICO score helps to ease the approval process because it demonstrates that you have good credit habits, and lenders see you as less of a risk.

Almost every lender has a minimum credit score in mind when they look at your file. A superb rating isn’t necessary, but most lenders would like to see a score in the high 600s. If you can get your score up over 700, you will likely get the lowest rate and the best terms on your mortgage refinance. A score lower than 680 doesn’t mean automatic disqualification, but you’ll need to look harder to find a lender. For these situations, the FHA offers loans with a minimum score requirement of 620.

The way you deal with debt and credit has a direct effect on your score. Before getting refinanced, check your score and your credit history. Annual credit report makes it easy to do both; just go to the website and input some basic information. You can get one free report each year from each of the three main credit reporting bureaus (TransUnion, Equifax and Experian). Other ways to raise your score include lowering your debt threshold and paying all your bills on time.

Borrowers often decide to refinance in order to get a lower monthly payment and a lower interest rate. If you cannot get refinanced due to a low FICO score, you can talk to your lender or financial adviser about alternative refinancing methods. Depending on your income and employment situation, you may be eligible for a modification. Modifications are similar to mortgage refinances in that they provide a better rate and a lower monthly payment, but you won’t have to apply for a new mortgage.

Home Equity Mortgage Refinance

Buying a new home is an expensive proposition. But if you already have an existing property then you can opt for a home equity mortgage refinance.

Mortgage means keeping a certain asset to the lender. This very asset will work as a guarantee that you will pay the amount back in the proposed time. If you cannot do that, your asset will be taken away by the lender. This can be dangerous because there are high chances to lose your asset or your property. The whole mortgage deal has become easier to manage after the home equity mortgage refinance system emerged.  A home equity means the current price of a house. The home equity mortgage system enabled the way to keep their home equity as a mortgage to the lender. By keeping this, you can get your loan.

Refinance is a small loan that can be opted to repay the previous loan. The tenure period of this loan is relatively shorter than the first mortgage loan. The interest is also very low. Usually people opt for a small amount as refinance loan.

Home equity mortgage refinance has several advantages.

By availing this kind of refinance, you can get a cash out facility. This system will provide you some extra cash. There is no such hard and fast rule that you have to spend the cash in some specific way. You can use it the way you like. In a home equity mortgage refinance your home price will determine your loan amount. The lender will first make a tab of the price of your home equity. You will get to acquire the amount based on that tab.

In modern times, home prices are very high. Almost every kind of home can earn a good amount. You can be sure of one thing that is you will definitely make a profit on your original property value. Thus, home equity mortgage refinance will secure your loan amount. Interest rates can also be cut down a bit by using home equity mortgage refinance. While refinancing, you need to pay some upfront fees. If you pay a good amount as down payment then your interest rate will definitely come down. As you are mortgaging your home equity, the lender will not check your credit history. It won’t be a problem for you to opt for a home equity mortgage refinance even if you have a bad credit history as you are keeping your home as a secure guarantee for the lender. Interest rates are highly important for this type of refinance. There are two types of interest rates available.

Fixed home equity mortgage refinance rate: This rate always stays static. Just because it is not connected with the market condition, it never fluctuates with it. Adjustable home equity mortgage refinance rate: This rate is completely dependent on the market condition. When the market rate becomes high, then the rate also goes up. When the market price becomes low, the same happens to the rate.

Mortgages for Commercial Properties

A mortgage by definition can be identified as a long-term loan on a piece of real estate. In some cases, the loan may be used to re-finance other real estate projects. Payment of this type of loan is often made over a an extended period of 15 – 30 years. Mortgage rates depend on a number of factors such as the value of the property.

For people wishing to own a home or invest in real estates, there are many avenues you can use to get a mortgage. Some of the options you may opt for include online brokers, mortgage companies, credit unions and other financial institutions such as banks. The loan has two parties involved; the bank/ broker as the lender and you, the borrower. Similar to other loans, the principal is the amount you are given for your projects. Interest is calculated using this amount.

There are two main types of mortgages based on the interest rate; floating/ adjustable rate & fixed. In the later case, interest rates remain at a constant whereas in the second case (adjustable-rate mortgage), the interest rate of the loan is fixed for some time after which it changes. You can safely conclude that part of the borrower’s risk is transferred to you, the borrower. If you have no idea as to which to go for, don’t worry. Visit a mortgage broker for advice, or you can try mortgage calculator on the website.

There are restrictions on commercial properties that has been mortgaged – there are limited options of reselling it until you have fully settled the mortgage. For more details on the terms and conditions of a home loan make an appointment with a mortgage broker. He/she will explain to you in details what a foreclosure is. A foreclosure refers to a provision by which the lender may seize your property in case of a default in payment or a breach of contract.