Mortgage what does points mean

In exchange for each point you pay at closing, your mortgage APR will be reduced and your monthly payments will shrink accordingly. Typically, you would buy points to lower your interest rate on a fixed-rate mortgage. Buying points for adjustable rate mortgages only provides a discount on the initial fixed period of the loan and isn't generally done. If you have a shorter-term plan, have limited cash, or would benefit more from a bigger down payment , paying points may not benefit you.

An experienced mortgage loan officer is just a phone call or email away, with answers for just about any home-buying question. Find a mortgage loan officer.

Learn more. Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice.

Mortgage, Home Equity and Credit products are offered through U. Bank National Association. Deposit products are offered through U. Consider the following example for a year loan :. You will need to keep the house for 76 months, or six years, to break even on the point purchase. Since a year loan lasts months, purchasing points is a wise move in this instance if you plan to live in your new home for a long time.

If, on the other hand, you plan to stay for only a few years, you may wish to purchase fewer points or none at all. There are numerous calculators available on the internet to assist you in determining the appropriate amount of discount points to purchase based on the length of time you plan to own the home.

The second factor to consider with the purchase of discount points involves whether or not you have enough money to pay for them. Many people are barely able to afford the down payment and closing costs on their home purchases, and there simply isn't enough money left to purchase points. Using a mortgage calculator is a good resource to budget these costs. Some people argue that money paid on discount points could be invested in the stock market and used to generate a higher return than the amount saved by paying for the points.

But for the average homeowner, the fear of getting into a mortgage they can't afford outweighs the potential benefit that may be accrued if they managed to select the right investment.

In many cases, being able to pay off the mortgage is more important. Also, keep in mind the motivation behind purchasing a home. While most people hope to see their residence increase in value, few people purchase their home strictly as an investment. From an investment perspective, if your home triples in value, you may be unlikely to sell it for the simple reason that you then would need to find somewhere else to live.

If your home gains in value, it is likely that most of the other homes in your area will increase in value as well. If that is the case, selling your home will give you only enough money to purchase another home for nearly the same price.

Also, if you take the full 30 years to pay off your mortgage, you will likely have paid nearly triple the home's original selling price in principal and interest costs and, therefore, you won't make much in the way of real profit if you sell at the higher price.

Purchasing a home is a major financial decision. Plan carefully. Look at the numbers. Before you start shopping, decide on the monthly payment amount that you can afford, and determine exactly how you will get to that payment—whether it's by making a large down payment, purchasing discount points or buying a less expensive home. Then be sure to shop around. Don't settle for the first mortgage package that you stumble across. There are plenty of banks to choose from and numerous resources, including real estate agents, mortgage brokers, and the internet, to help you shop for the best deal for your situation.

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Understanding how points work is just one important factor in your decision. Mortgage discount points allow you to reduce your interest rate by essentially prepaying interest upfront. Buying points can save you money on interest over time, but only if you stay in the home long enough for the discounted interest rate to make up for the upfront cost of points. Do the math to find out if buying points is the right choice for you when you get a mortgage loan.

Read this post in Spanish. Image: A mature couple looking at architectural plans together at home, wondering what mortgage points are.

In a Nutshell Mortgage points, also known as discount points, allow you to prepay interest on your mortgage. Advertiser Disclosure We think it's important for you to understand how we make money.

When you take out a mortgage, your lender offers you an interest rate based on several factors, including market rates and your credit profile.

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. Christy was previously a college teacher with experience writing textbo… Read more.