So, as many of you know, not only am I real estate investor, but I’m also a mortgage loan originator. What does that mean? That means I’m federally licensed to help a borrower choose a loan product and work through the application process-and finally, get a mortgage loan!
More importantly, I help my clients make a decision on what makes the most sense financially based on their personal situation.
I’d like to just briefly, in very basic terms, explain what discount points are and how they work and why you should or should not use them. I talk to consumers all day who say to me: “I want to lower my interest rate, but I don’t want to pay any points.”
Points are, in short, prepaid interest. You can use the points to buy down your interest rate. They show up as a cost on your loan estimate/closing paperwork.
Points go HAND-IN-HAND with your interest rate. So without paying points, there’s a good chance that you’re not going to be able to lower your interest rate enough to justify the cost of refinancing (unless you’re in a terribly inefficient loan right now).
But Angel, I’ve been working hard to pay extra on my mortgage. Does it really make sense to add money to what I owe?!
Sometimes! It really depends on how much extra you’re putting towards your mortgage, how much it would cost to refinance, and how efficient your current loan is.
If you have consistently been putting extra money towards your mortgage or are in a spot financially where you will realistically be putting more towards your mortgage than you’re required to, focus on the amortization table. Make sure you are aware of the loan amount you’d be borrowing, and are clear about where you are currently on your amortization table. Sometimes, it does make sense to add costs to your loan to take a lower rate to be able to make more of your monthly payment go towards principle. Sometimes, it doesn’t make sense.
Make sure you’re very communicative with your loan advisor up front about what your goals are, what you’re currently paying towards your mortgage, and what your intentions are. If you feel like your advisor is trying to “sell you” on the loan, ask to see the math. If they can’t show you the math that illustrates the new loan accomplishing your goals better than your current mortgage, there’s your answer.
Angel, I want the maximum monthly savings possible!
That’s wonderful! If you want maximum monthly savings, use all the discount points you can possibly use. But Angel-that’s more costs-wouldn’t that make my payment go up?! Probably not as much as the interest rate would drive it down. Lean on your ADVISOR to help you make that choice correctly.
There’s more to it than the above mentioned, but I think those two points made are starters. In my experience, many clients I work with are concerned about this unnecessarily. It makes sense, the savings comes with a large price-tag, and can be a little overwhelming.
My best advice, find a good loan advisor who really understands math AND understands your goals.