Mortgage lenders use the term”factors” to describe certain costs or charges associated with getting financing. Factors are used in several ways, and also the value is based upon the size of their mortgage. The number of factors that must be compensated is also related to the final interest rate on the loan.
Function
There is in mortgage terms A point 1 percent of the loan amount. If the loan amount is $350,000, 1 point is $3,500, two factors would be $7,000. Points are fees paid to the lender for several functions. Using points allows the lender to scale the sum of the fees to the size of the home mortgage.
Types
The two big types of mortgage points are origination points and discount points. Origination points are the lender’s fee for completing the procedure and getting the mortgage approved and financed. Discount points are upfront payments for reduced interest prices. A lender will generally quote mortgage prices with payments of zero, one or two points. Paying discount points allows the homeowner to buy down the mortgage rate.
Effects
The expense of mortgage points does not differ by type. If one lender has a one-point origination fee and one-point discount fee for a certain rate and a second lender has no origination fee and a two-point reduction fee, the cost is exactly the same. The 1 difference for the borrower is that origination-fee points aren’t tax-deductible and discount points could be tax-deductible. Purchasing a mortgage using factors will result in interest savings a few times larger than the price in points in the event the mortgage has been paid in full.
Considerations
To compare mortgage rates between competing lenders, the borrower must consider both the speed and total points to obtain the mortgage. If one lender has total origination and discount points lower than another lender for the exact same rate, the reduced points is a much better bargain. To compare unique rates and factors, on a fixed speed 30-year mortgage, 1 point is worth approximately a quarter of a percent point. You can find the value of a point by comparing the prices of various discount points. Have a look at the prices for one discount point and for 2 discount points. The difference in prices is what one point is worth once converted into speed in a loan.
Potential
Mortgage points can be paid up front as part of their loan closing prices or rolled to the mortgage balance. The decision to roll some points to the mortgage should be carefully considered. The amount of equity in the house and effect on loan to value can make including the points at the mortgage a costly option. Rolling the points to the loan may also increase the total amount of interest to be paid on the loan, negating some of the advantage of the reduced rate. A homeowner or buyer must think about the speed, points and payment choices when determining what mortgage options are perfect for her situation.