More than 6 million people are expected to purchase a new home in 2016. And, based on data from the National Association of REALTORS®, about one-third of those will be first-timers.
However, there's something with which all home buyers struggle when shopping for a mortgage -- the question of whether to pay "discount points".
Discount points can be expensive and sometimes increase the amount of money required at your closing.
However, as a home buyer, there are a handful of situations in which paying discount points is beneficial -- especially when you can get the seller to pay your closing costs.
Should you pay points? Should you not? The answer depends on your situation.Click to see today's rates (Jan 24th, 2017)
Mortgage discount points are one-time, upfront closing cost which "discount" your available mortgage rate.
They're common and optional, and paying one point will typically reduce your quoted interest rate by 25 basis points (0.25%).
The cost of one point is equal to 1% of your loan amount.
Points are also tax-deductible, in many cases.
Because paying discount points gets you access to lower mortgage rates, when you pay them, it's commonly known as "buying down" your rate.
For example, if you purchase a home using a loan at the 2017 conforming loan limit of $424,100 and with a mortgage rate of four percent, you can often elect to pay one discount point to your lender in exchange for a new, lower rate of 3.25%.
This can yield tremendous, long-term savings to a 30-year homeowner.Click to see today's rates (Jan 24th, 2017)
Mortgage lenders typically discount one quarter-percentage point for every discount point paid; and lenders will often allow up to 4 points paid at closing.
In general, paying 4 points would discount your rate by 100 basis points (1.00%), which is huge. However, just because you can pay points doesn't mean that you should.
Discounting your mortgage rate via mortgage discount points is a luxury, not a necessity.
Therefore, it it will move you into an unsafe financial position to paying discount points on top whatever the mortgage closing costs are for your state, it's best to let the opportunity pass.
Note, however, that your real estate agent may be able to negotiate your closing costs into the home purchase contract. This method of "having the seller pay your closing costs" is known as "seller concessions".
In addition to the cost considerations of paying discount points, there's the question of the value of paying mortgage discount points.
Paying a fee to lower your mortgage rates might make sense over a 5- or 10- or 30-year time window. But, if you plan to move within a few years; or refinance your loan, you'll likely never recoup your initial investment.
In general, mortgage lenders discount rates by 25 basis points (0.25%) for each discount point paid. However, there are some loan type which grant better loan discounts than others.
A 5-year ARM, for example, offers a smaller return on discount points paid than a 30-year fixed. The same is true for FHA loans versus conventional ones.
You can typically discount your rate more using a FHA-backed loan -- but that doesn't mean that you should.
A great mortgage lender will talk you through your discount point options and help you choose the proper path. And, remember -- there's never a "right" answer -- only the answer with which you're most comfortable.
The decision to pay mortgage discount points is a mathematical one. You can pay them yourself and hope to recoup; or, pass on points altogether.
Get today's live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.Click to see today's rates (Jan 24th, 2017)
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2017 Conforming, FHA, & VA Loan Limits
Mortgage loan limits for every U.S. county, as published by Fannie Mae & Freddie Mac, the Federal Housing Administration (FHA), and the Department of Veterans Affairs (VA)