Clients Ask “What Are Points on a Mortgage Loan”?
There can be a lot of unfamiliar terms, like “points on a mortgage loan” used in connection with real estate transactions. Here, Attorney Philip Hundl talks about mortgage points and some considerations in paying points in return for a lower interest rate on your mortgage.
If you have questions, please call our office for an appointment at 800-929-1725. We have five convenient offices in Richmond and Fulshear in Fort Bend County, Bay City in Matagorda County, and Wharton and El Campo in Wharton County.
What are points on a mortgage loan? Should I pay “points” on my mortgage?
Question: I always see these low-interest rate mortgages and wonder if there is a “catch.” When I call to inquire, the mortgage broker always seems to mention “points.” What are points on a mortgage? Does it make sense for me to pay points on a mortgage?
Answer: It depends on how long you intend to stay in the house. A “point” is a term used in the mortgage lending industry that refers to 1 percent of the mortgage loan. For example, on a $150,000 loan, one mortgage point would be $1,500.
Also, be careful with other loan fees that may not be very openly disclosed. There are “origination” and “discount” points. Origination points are charged for originating or initiating your mortgage (to cover administrative costs). Discount points may be offered to “buy down” or lower your interest rate, and therefore, your loan payments. Discount points are optional. Lowering your interest rate by buying down the rate will result in paying less interest over time on the principal.
The longer you plan to stay in your house, the more worthwhile it can be to pay mortgage points. If you pay a few points and then sell your home after two years, you’ll have enjoyed lower monthly payments due to the lower interest rate, but the savings probably won’t have made up for the points you paid. For example, if you pay $8,000 in points to save $100 per month, it will take you 80 months to break even.
So when comparing mortgage interest rates, be sure to compare apples to apples and take into account the origination fees and points and not just the lowest interest rate.
Philip J. Hundl is managing partner and a shareholder at the law firm of Wadler, Perches, Hundl & Kerlick in Wharton, Texas, and is a member and director of the TexasGulf Federal Credit Union.
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