Of all of the things you will have to understand about your new mortgage, one of the most confusing may be points. Don’t get origination points (to pay to get the loan) confused with discount points (to reduce the rate on the loan).
They are called “discount” points, since they reduce the interest rate on the mortgage. Your interest rate is determined by many factors, the most important of which is your credit rating. But the interest rate is paid over the entire life of the mortgage, and so a higher rate can increase the cost of the loan significantly.
Lenders aim at a certain rate of return relative to the rate of risk they take, and factors such as points will increase their rate of return, but is it a good idea for the borrower?
Well, first of all, you should ask to see if your seller will consider paying these points. This frequently occurs in a competitive real estate market when sellers have to make the sale as attractive as possible.
But if you are paying the points, let’s calculate the costs. If you were given a mortgage at 6% on a $100,000 home, should you pay 2 points to lower it?
On a 30 year mortgage, two points will lower the mortgage to 5.5%. Not significant, but how much difference does that make in the long run? The cost of 2 points on a mortgage of $100,000 is $2,000. What will be the savings over the life of the mortgage?
You can probably find a calculator on the web that can figure out the savings for you.
Now, calculate these costs over the $2,000 you would pay for points to lower the loan to 5.5%. Total interest: $104,404.04; total payments: $204,404.04; loan payment: $567.79.
Here is how that calculation comes out: (do the math yourself, if you like): Savings on monthly mortgage: $31.76; Savings in total interest: $11,434.15 Now you know why so many choose to pay points.
Talk to an expert about calgary mortgage rates or find more about best edmonton mortgage broker
