Borrowers typically pay points in connection with a mortgage loan. One point is equal to 1% of the loan. A fee of one point on a US Dollars 150,000 loan would be US Dollars 1,500. Many people get confused and think the points are calculated based on the purchase price. They are not - the loan amount is the important number.
The money paid for points can be used for a wide variety of things, so it is important to find out the purpose of the points, as well as the amount, when comparing loans. There are two varieties - origination points and discount points.
Origination points cover closing expenses and fees, including the mortgage broker's profit. Many of the fees covered by origination points are really just disguised additional profit for the lender, and they are completely negotiable.
Discount points are used to buy down your interest rate because you are prepaying some of the interest with the discount points. The amount you can reduce your interest rate varies with the type of loan and market conditions at the time. Typically, though, you will have to make mortgage payments for several years before you start saving money because of the buy-down.
Some loans contain provisions requiring you to pay a penalty if you pay the loan off earlier than agreed or if you make larger principal reductions than the lender planned. If there is a penalty, it is generally only during the first few years of the loan. Sometimes it is a percentage of the loan balance at that time, and other times the penalty is six to twelve months of interest. The reasoning is that a lender counts on receiving an income stream for a certain period of time. If it receives its principal early, then it must loan it to someone else as quickly as possible. That might not happen immediately, and it will almost always require some marketing and administrative expenses.
The most common type of mortgage loans today are fully amortizing loans, which involve regular monthly payments that will eventually pay the loan in full over a specified amount of time. Thirty-year terms are the most widespread, although some longer terms are now allowed, such as forty- and fifty-year mortgages.
Many people think that shorter loan terms are better, as they will save the borrower several thousands of dollars in interest over the life of the loan. Over the course of thirty years, a US Dollars 100,000 mortgage at 6% interest will result in US Dollars 115,838 in interest, with payments of US Dollars 599.55 per month. For the recommended twenty-year term, total interest drops to US Dollars 71,943.20 but payments increase to US Dollars 716.43 per month.
However, most Americans keep their homes less than ten years. This means that as a practical matter, the property is sold and the loan is paid off long before the completion of the term, so people can actually save money by not taking out a loan with a shorter term but higher monthly payments.
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Note: This article was sent to us by: Nathaniel D. Wadross at 06262010
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