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Understanding Positive And Negative Mortgage Points
Mortgage points play a role in the amount of interest you are going to pay on your mortgage. They play a direct role in how much you are going to pay on your mortgage rates. They can raise or lower home mortgage rates by increasing or decreasing the interest. Borrowers have to determine which makes the most sense for their situation. Also, both point systems are in effect for the length of the loan, with one being more beneficial than the other.
Positive points can work in your favor as they lower the interest rate by a certain amount. They are purchased at the point of initiating the loan and cost a percentage of the total of the loan. For example: The loan you are taking out is for $150,000. One point costs $1500, or 1 percent of the loan. The $1500 has to be paid up front in order to lower the interest rate. Each point reduces the interest by .125 percent which means in order to reduce by .250, you need to bring $3000 to the table. In other words, if you have an interest rate of 4.5 percent and you want to lower it to 4.25 percent, you have to pay $3000. The lower rate is in effect for the length of your loan, so it may be worth paying the money at closing. It all depends on how much the monthly payment is lowered.
Negative points are the exact opposite of positive points. They add to the interest rate instead of reducing it. However, the bank pays the customer to take a higher interest rate, sometimes calling it a rebate. This sounds like it is a good deal, but it is not nearly as beneficial to the borrower. Negative points work like this: A borrower obtains a loan for $150,000 with an interest rate of 4.5 percent. The bank offers two negative interest points for a total of $3,000 and increases the interest to 4.75 percent. However, the bank typically does not write you a check for that $3000. Instead, the bank applies it to closing costs and fees. This gives you an alternative to rolling the costs into the mortgage and paying them for 15 to 30 years. The increase in interest has the potential to create a lower monthly payment than including costs.
Negative points make the most sense for someone who is tight on funds or does not have the intention of staying in the house for a long time. For long-term owners, there is the option of refinancing in the future if mortgage rates stay low and in their favor. Positive points are beneficial for the individual who plans on staying in the home for the length of the loan and doesn't want to take the risk of interest rates increasing. Ultimately, the borrower needs to make his choice based on what makes the most sense for his situation.
Positive points can work in your favor as they lower the interest rate by a certain amount. They are purchased at the point of initiating the loan and cost a percentage of the total of the loan. For example: The loan you are taking out is for $150,000. One point costs $1500, or 1 percent of the loan. The $1500 has to be paid up front in order to lower the interest rate. Each point reduces the interest by .125 percent which means in order to reduce by .250, you need to bring $3000 to the table. In other words, if you have an interest rate of 4.5 percent and you want to lower it to 4.25 percent, you have to pay $3000. The lower rate is in effect for the length of your loan, so it may be worth paying the money at closing. It all depends on how much the monthly payment is lowered.
Negative points are the exact opposite of positive points. They add to the interest rate instead of reducing it. However, the bank pays the customer to take a higher interest rate, sometimes calling it a rebate. This sounds like it is a good deal, but it is not nearly as beneficial to the borrower. Negative points work like this: A borrower obtains a loan for $150,000 with an interest rate of 4.5 percent. The bank offers two negative interest points for a total of $3,000 and increases the interest to 4.75 percent. However, the bank typically does not write you a check for that $3000. Instead, the bank applies it to closing costs and fees. This gives you an alternative to rolling the costs into the mortgage and paying them for 15 to 30 years. The increase in interest has the potential to create a lower monthly payment than including costs.
Negative points make the most sense for someone who is tight on funds or does not have the intention of staying in the house for a long time. For long-term owners, there is the option of refinancing in the future if mortgage rates stay low and in their favor. Positive points are beneficial for the individual who plans on staying in the home for the length of the loan and doesn't want to take the risk of interest rates increasing. Ultimately, the borrower needs to make his choice based on what makes the most sense for his situation.
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