The low mortgage interest rates that you find online or in the newspaper aren’t necessarily what you’ll pay when you apply for a loan. Why? Because banks will charge you “discount” points to get the best rate, which adds to the cost of the loan.
Points, or discount points, are expressed as a percentage of the loan amount. The point “discounts” the interest rate, that’s why it’s referred to as a discount point. If your mortgage is $300,000, then one “point” is $3,000. For each point you pay, your interest rate should be reduced by about ¼ percent.
On a 30-year mortgage loan at $300,000 and 5.00%, the monthly payment works to $1,610 without any points. Paying one point ($3,000) would reduce the rate to 4.75%, making your discounted payment $1,564 per month.
That’s a reduction of $46.00 per month. Now weigh the cost of $3,000. To get that, divide $46 into $3000. The result is 65. It will take you 65 payments to break even, nearly 5 ½ years. It’s worth it if you’re planning to stay in your home for 5 to 10 years or longer. If not, you’re far better off using the $3,000 to pay down your loan principal or buying furniture for your home.
There’s another way to get the best mortgage interest rate – that’s to have the best credit scores possible. Those with near or perfect credit are considered low risk by banks. As always, consult your financial or mortgage advisor for more information about home loans. Need one of those? We can recommend some good ones for you to check out. Just reach out to Carol at (925) 487-2353 or at firstname.lastname@example.org and she’ll make an introduction.