If youre looking to buy your first home, and are new to the real estate game, then youve probably heard people discuss points, and youre not too clear on what they are. Points are, essentially, a form of prepaid interest on your mortgage loan. A point usually equals one percent of the loan.
When a lender charges you, the borrower, points on your mortgage loan, the lender is making more money on the loan beyond the total of the interest rate. It will benefit the borrower, because by paying points, youre lowering the interest rate on the loan, and so youll have a smaller monthly payment to make. When you pay points on your mortgage loan, youre essentially making a big down payment on your loan in order to get a better interest rate, which will benefit you in the long run. So paying points is really a question of delaying gratification, because at some point in the time span of your mortgage loan, youre going to reach a moment of equilibrium where the amount of money you spent on paying points equals the money youve saved by paying the lower interest rate. Once you get past that moment youre saving even more money.
If you happen to sell your home before you reach the moment where savings on monthly payments equals the amount spent on points, youre going to lose money on the purchase of the points. So its somewhat of a risk to buy points up front, because if you sell your home before the savings are fully realized, youve lost money.
Buying a home is a complicated affair, so before you do anything, be sure to sit down with a real estate expert or a trusted financial adviser and go over the process in as much detail as possible, so that you feel comfortable that youre making the right financial decisions.
