Mortgages are the most common way for Americans to fund their pursuit of the American Dream of home ownership, but the final price tag of a home mortgage is comprised of more than a great interest rate and loan amount. First time home buyers who have banked enough down payment to enter the real estate market for the first time, need to know about all the additional costs associated with a mortgage in order to properly determine if the financial means necessary to make the commitment exist.
What Are Discount Points
Within the retail industry, paying for the privilege of receiving a discount is an absurd idea, however, when it comes to home loans, discount points are a way of life. Mortgage Marvel, the industry's premiere mortgage rates origination tool defines discount points as, "Fees that are collected by the lender in exchange for a lower interest rate. Each discount point is 1% of the loan amount. Sometimes referred to as 'points'."
Buying a discount point or two can add big chunks of money onto the closing cost of a homeloan. If a home buyer plans on staying in their home for a short time (five years or less), chances are it is more cost effective to pay a higher interest rate than waste money on points. However, if a home buyer is making a long-term commitment, consumers interested in long term savings should take the time to crunch the break even level of a discount point on a mortgage calculator.
Consider the case of a consumer looking to secure a 30 year fixed rate home loan of $400,000 at a rate of 5.25 percent. Buying a discount point will add an additional cost of $4,000 to the immediate total and will typically lower the interest rate by a quarter of a point to 5 percent. While there is no arguing that $4,000, is a hefty chunk of change, it is important to note that the initial expense can offset total mortgage expenses by tens of thousands of dollars over the life of a loan. Without paying for the discount, that loan amount will result in a monthly payment amount of $2,208.81 and a discount point will lower the obligation to $2,147.29 per installment. The monthly savings would appear nominal at $61.53, but would shave an excess of $22,000 of the total amount of interest charged during the 30 year loan terms, resulting in a total savings of around $18,000 for the initial points investment.
Fees Add to Mortgage Costs
Each lender is a bit different from their competition and the mortgage fees charged for the privilege of a home loan will fluctuate with the lender. The fees charged have been established to offset the expenses accrued by a lender during the loan underwriting process. While lender 'A' may tease consumers with promises of waiving closing cost charges, they may charge a higher interest rate in order to make up for that initial hit they are taking. In turn lender 'B' may offer lower than average interest rates, but may require a consumer to buy discount points for the privilege.
Those subtle nuances make the mortgage selection process confusing. Consumers must conduct their due diligence to ensure that whatever loan opportunity they are pursuing makes the most financial sense for their long term goals.
How to Cut To The Mortgage Chase
Mortgage seekers have been taught to believe that the interest rates charged are the only thing that matters in regards to a home loan, but discount points and fees have to be included in the equation to ensure the best value in home buying. Consumers looking to level the playing field when comparison-shopping for a home loan will have to take the time to manually calculate all the mortgage offers (including points and fees). It is important to note, that human error can prove to be very costly and perfection is required for those who opt to crunch the numbers themselves, luckily there is a much easier way to get the info courtesy of Mortgage Marvel.
Mortgage Marvel can instantly provide borrowers with rate information from more than 200 lenders nationwide. The interest rate information we deliver is up-to-date and presented in a simple comparison table that will allow consumers to compare loan opportunities, apples-to-apples. Based solely on a zip code search, Mortgage Marvel will instantly produce a table that includes mortgage rates, discount points and any fees associated with the transaction. This document will allow consumers to compare loans side by side and completely eliminate the need for having to manually crunch the numbers themselves. Not only does this process completely wipe out the risk of human error, but can also make mortgage shopping a stress free and easy to understand.
