HOME buyers and people looking to refinance can lower their interest rates with the help of mortgage points.
They could come in handy as the average rate on a 30-year mortgage climbed from 3.76% to 3.85% last week, according to Bankrate.
The mortgage rates have returned to levels last seen in the early days of the pandemic, according to the weekly survey of large lenders.
Meanwhile, the Federal Reserve plans to hike interest rates this year too, which will affect homeowners across the US.
Below we explain how mortgage points work.
What are mortgage points?
Mortgage points are fees a home buyer pays directly to the lender.
There are two different types of mortgage points — discount points and origination points.
Discount points represent prepaid interest that can be used to negotiate a lower interest rate for the term of a loan.
For instance, by paying upfront 1% of the total interest to be charged over the life of a loan, borrowers can usually get mortgage rates that are about 0.25% lower.
This is also called buying down the rate.
Meanwhile, origination points don’t directly help you get a lower interest rate and are instead lender fees that are charged for closing on a loan.
Lenders are required to provide a closing disclosure form that shows all the fees you’ll pay three business days before the scheduled closing of your loan.
So, it is important to review this document to ensure you are paying discount points rather than origination points.
Are mortgage points worth it?
To determine if mortgage points are worth it, you will want to figure out your break-even point.
The break-even point is where you’ve paid off the cost of buying the points.
If your break-even point comes after your desired sell date, then it is generally not worth it.
Therefore, the value of mortgage points will ultimately depend on how long you want to stay in your home.
If refinancing, you can figure out your break-even point by dividing your closing costs by the amount you save every month.
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