In home acquisition, you must not only understand what type of mortgage you wish to acquire but also the expenses accompanying it. All these costs will be paid to the lender at closing. It is essential that you fully understand the terms related to the mortgage like points, rates and fees.
I. Purchase Points
No other issue puzzles a borrower more than points. Points are otherwise known as “discount points” or "buy-down”. It is an up-front fee paid to your lender at closing to reduce the interest over the life of the loan. Every point is one percent of the total loan amount. A loan of $200,000 one point will give $2,000 and 1.5 points is equal to $3,000. Buying more points means a lower interest rate but also more cash you need at closing.
Is it necessary to purchase points, and how many? Purchasing points should depend on the length of time you wish to live in your home and the amount you can afford to pay monthly for your mortgage. If you plan to stay in your home for five years or more, it would be wise to purchase points. The longer you live in your home, the more savings you get on the interest rate.
II. Interest Rate
Interest rates are the amount charged to you by the lender for using their money to buy a property. This will determine how much is your monthly dues. Generally, a higher interest rate means you also have to pay higher monthly dues. Bear in mind that mortgage interest rates change constantly, some change everyday and others will change hourly.
When you discuss with a lender about a particular rate, it does not mean that you get that rate when you close your mortgage unless you formally lock-in the interest with the lender. Locking in the interest will guarantee that you get the loan with the exact rate of interest. The lender will let you lock in interest for 15, 45 or 50 days. However, this alternative is more expensive since it imposes bigger risk on the part of your mortgage provider.
III. Fees
Fees are always connected to a mortgage. The fees will cover the loan processing and underwriting. Fees will also include charges for ensuring the title of the home is free and clear, land survey and home appraisal will give an estimate of the home value.
Deciding on the type of mortgage to get will depend on what the lender does because different lenders may charge differently. Some will charge you less fees on closing to lure you in but may also charge higher rates of interest. Nevertheless, it will depend on your needs. You may or may not be able to afford paying more at closing or are willing to pay more over the term of the loan.
Do your research before closing comes to ensure that there are no concealed fees and ask many questions from your lender to understand the costs involved in your loan. Note that buying a home is a costly venture that requires all your existing resources like time, money and energy. Therefore, it is only fitting that you understand interest, points and fees in relation to your home equity loan if you want to enjoy a hassle-free, fruitful and long-term undertaking in the world of real estate.
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