What Are Points on Mortgage Loans?

What Are Points on Mortgage Loans?

What Are Points on Mortgage Loans?

Just when you think you have your mortgage loan figured out, it seems like another fee or restriction is added on. You already have to worry about what kind of interest rate you will be charged, choosing between a fixed loan and an adjustable loan, and how big a down payment you can come up with. Unfortunately, there’s even more to it than this. For one thing, you need to be aware of many possible fees including upfront interest that can be added on when you initially take out the loan.

One common fee we would like to draw your attention to is upfront interest, otherwise known as mortgage points. Officially, a mortgage lender will charge you points in order to make up for the hassle and expense of evaluating your mortgage loan application. These points are typically assessed as a percentage of your total loan.

One point simply means one percent of the total mortgage you are taking out. Obviously, since mortgage loans can reach into the hundreds of thousands for most home buyers, a difference of 1{bcdc0d62f3e776dc94790ed5d1b431758068d4852e7f370e2bcf45b6c3b9404d} or 2{bcdc0d62f3e776dc94790ed5d1b431758068d4852e7f370e2bcf45b6c3b9404d} can add up to a big extra fee.

If you consider all the other possible fees including the cost of inspection, title insurance, and possibly upfront property taxes and homeowners insurance (usually reserved for those with poor credit), saving money on points should be a priority when choosing a loan.

When you’re shopping around for loans of texas mortgage, keep in mind that the interest rate will be inversely proportional to the points on your loan. What in the world does this mean? It is very simple actually. The lower the interest rate for your fixed loan, the higher your points (or upfront interest you will have to pay at closing) will likely be. Conversely, a high interest rate may translate into low points or even zero points. It is pretty easy to understand the reasoning behind this, since the lender will always try to compensate for any supposed deal you’re getting.

That’s why it’s important to understand all of the aspects of your loan and not simply be seduced by the attractive parts. For example, a “no points” loan probably means you’ll pay a much higher interest rate. Since the interest rate will continue throughout the life of your loan (assuming you chose a fixed rate loan), you’re actually getting a poor deal when you examine it closely. You’re better off paying something upfront in exchange for a lower interest rate in the long run.