This week we introduce a new periodic content at Houstoning–Mortgage Minutes. Each session of Mortgage Minutes will provide the reader with mortgage news, industry updates, changes in relevant laws and other quality content. Enjoy!
Mortgage rates for both purchases and refinance loans are at historic lows. Even when rates are low, some lenders require a borrower to pay discount points. There are generally multiple combinations of rates and discount points offered by lenders, and the borrower can choose what combination they prefer. A rate with no discount points is called the Par Rate. One discount point is 1% of the loan amount and is often referred to simply as a “point”. So if your borrowing $300,000, and your lender is charging 1 Point discount, this means you will pay $3,000 to the lender. You may also hear the word “point” when discussing origination fees. Again, 1 point origination fee is 1% of the loan amount. 1/2 a point is simply 1/2 of 1%, or in our loan amount example, 1/2 a point of $300,000 is $1,500.
It is not always a simple decision regarding paying discount points to get a low rate or not. There are many factors to consider…how long you plan to keep the mortgage, how much cash do you have to spend on discount points, as well as what monthly payment can you afford. The lower your rate, the lower your monthly payment will be. One should compare monthly payments at various rate/point offerings to calculate how long it will take to recoup the upfront cost of the discount points. If you are not planning to stay in your home long enough to recoup the discount point(s), then it may not make sense to pay the discount. Conversely, if you are staying in your home past the recoup period, then you could save hundreds if not thousands of dollars in interest charges over the life of the loan. Always ask your lender for the par rate, and for the lender to provide you with various discount point and rate offerings to determine what is best for you. As always, let your tax preparer know if you paid any discount points (treated as mortgage interest) or origination fees, as both can result in lower income tax bills in many scenarios when itemizing.
Please feel free to contact me if you have any questions or would like help getting a new mortgage or refinancing your existing mortgage to take advantage of the current rate environment.
Brian Bazar, Sr. Mortgage Banker
402 E Trunk Street, Suite G1, Crandall, Tx 75114
With over 35 years in the banking and mortgage industry, Brian is recognized as an industry expert.