Home Loans Nashville: What Do Points Have to Do With My Mortgage?

January 29, 2009 · Print This Article

Home Loans Nashville: What Do Points Have to Do With My Mortgage?

You may have heard of points when looking for a Nashville mortgage. Maybe your loan officer told you that you could trade points for a better interest rate. That sounds good, but just what are points? Let me give you a better idea of just what points are and how they work.

What Are Points?
Points, more specifically discount points, are a percentage of the total loan amount for the house that is pre-paid to the lender. Each point is worth one percent. Your lender may offer a lower interest rate for your mortgage loan if you buy discount points.

What do Discount Points Cost?
The cost of each point is equal to one percent of the loan amount. For instance, for a $200,000 loan one discount point equals $2,000.

For example, you are trying to buy a home in Nashville worth $200,000. The lender may tell you that if you buy 2 points at $2,000 each, you’ll get an interest rate two percent better.

Should I Buy Discount Points?
Some lenders will allow you to purchase discount points to be approved for the loan. By buying a discount point, you’ll get a lower interest rate. This can reduce your monthly payments, which could put your credit to debt ratio in the right range.

You have to know how long you’ll live in the house or you could lose money purchasing the discount points. If you sell or refinance before you reach the break-even point, you’ll wind up with a net loss. Use an online mortgage point calculator to help you determine if buying discount points is a money saving proposition for you.

Points may be a good way for you to save money on your Nashville home loan if you plan to stay in your home for a long time. Want one more benefit? Discount points are tax deductible in the year in which they’re paid.

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