Mortgage points | what are and how do they work?

Mortgage points, what are?The structure of home mortgages varies in many country around the globe . Paying for mortgage points is common practice and, at least based on anecdotal evidence, can be a unique approach to home financing.We will discuss the different points of mortgage and how to make them work for you.

Mortgage points, what are they?

The mortgage points are available in 2 variants: discount points and points of origin. In any case, each point purchased is equal to 1% of the total loan amount . For example, on a $100,000 house, one point equals $1,000. The payment of the origin of the points is not required by many mortgage lenders, and those who require payment, very often it is possible to negotiate the tax. Remember that points of origin are not tax-deductible.

Discount points refer in any case to prepaid interest. . The purchase of each point, makes that the installment of interest on the loan has a saving of 0.25%. Most lenders offer the opportunity to buy from zero to 3 discount points. We focus mainly on discount points and how mortgage repayments can decrease. We also want to remember that when rates are advertised, they often contain a rate that is based on points of purchase. If the taxes are specified, you can deduct discount points from the taxes.

Pay or not points

deciding whether or not to pay the discount points requires first of all to understand how the structure of mortgage payments is composed. There are two factors that cannot be overlooked when considering paying or not paying discount points. The first relates exclusively to the length of time you want or plan to live at home. In most cases, the longer you stay in the house, the more you will save if you buy discount points.

Now let’s see the following example:

Suppose now on a mortgage of $ 100,000 with an interest rate of 6%, the monthly payment will be for both the principal and the interest of $ 599. 55 per month. So now, if you bought three discount points, the interest rate will obviously be 5.25% and the monthly payment will be $552.20. By doing so, buying these three points, which will lead to an obvious discount, will cost you $ 3 000 with a saving of $ 47. 35 per month, which is not little considering everything. You will need to keep the house for no less than 63 months to stop, if necessary, also the point of purchase.  As is already known a 30-year loan has a duration of 360 months, we can see that the purchase points is a good move, if the intention is to live in a new home for an extended period of time.  And if you intend to stay for a few years?, you might consider buying fewer points or even none.

With a simple calculator available anywhere on the Internet or on your phone, it might help you determine the appropriate amount of discount points that you should buy based on the length of time you plan to own your home. The other consideration to keep in mind when buying points, refers to fact if we have enough money to pay for them. Many people can only afford the costs of paying and closing the purchase of the house and in most cases does not have enough money to buy points. Suppose on a house of $100,000, three points discount will definitely accessible to many people, but on a house of $500,000, three points will cost much more. The normal advance of 20% on the $100,000 needed to buy the house, and very different from the advance needed to buy a house of $500,000, is often and much more than what many people can afford. So always calculate the monthly you pay is a good resource to balance these costs.

Save on mortgage loans

The cost of new mortgage loans and payments on outstanding household debt can have a significant impact on the growth rate of an economy. There is evidence that interest rates can have a significant impact on an economy where variable rate loans are predominant over fixed rate loans. Beyond the well-known differences between the US and around the globe markets in terms of the fixed and variable rate mortgage ratios, interesting trends have emerged since the financial crisis. In the United States, the mortgage market is now dominated by the fixed rate as it has not been the case for years, while variable rate loans have fallen from more than 20% of loans between 2016 and 2019 to less than 10%.

The average maturity of US mortgages is just over 23 years, due to the overwhelming number of 15- and 30-year fixed-rate mortgage products, but the effective maturity tends to be much shorter, as loans are fully repaid early. However, if we begin to see higher yields and mortgage rates, these loans will have a much longer maturity than in recent years. In addition to the increase in the share of fixed-rate loans, it should be noted that the average return on mortgage loans has fallen to 3.8%, a level never seen before in historical data. In essence, this means that the average mortgage borrower in the United States has a 23-year loan at a fixed rate of only 3.8%.

Advantages

The advantages of the fixed rate at low levels in the United States are clearly visible. With each 1% increase in mortgage rates, the average borrower around the globe, sees another 3% of his monthly salary disappear in debt service. In fact, two important assumptions are generous for market around the globe. The first is that mortgage rate increases occur rapidly, so mortgage rates on 2 or 5-year fixed-rate loans remain fixed, rather than reaching the end of the fixed-rate period, forcing borrowers to refinance the loan at the current fixed rates, or at the standard variable rate. The second is that the current variable rate should be equal to the average lending rate around the globe (2.98%): a quick online search reveals that it is actually closer, if not higher, than 4%.

This work is based on various assumptions and is therefore very subjective, but the implications are clear: the monetary mechanism and potential ramifications on consumption vary significantly between many countries. As interest rates in the UK contract for example , and both demand and consumption adjust relatively quickly. The US household sector, on the other hand, is much less sensitive to interest rate movements in this period, so it is possible that the rate increase needed (or the time required for the effects of monetary policy to be felt) is higher than the current discounted level.