Mortgage rates on the rise! Ways to lower costs of a home loan
If you are among the majority, buying your dream home will include the need to finance the purchase through a mortgage loan. Because financing a home is usually the most expensive purchase an individual will make during the course of a lifetime, it is worth the time and effort to shop around for the lowest possible mortgage interest rate. Although rates have been at all-time lows as recently as the beginning of 2013, reports indicate that they are rising at a steady rate. One option for borrowers looking to keep their mortgage interest rate low is to purchase mortgage points as part of the loan agreement.
In the three month period from May of this year through the end of July, mortgage interest rates for a 30 year fixed mortgage have risen from an average of around 3.4 percent to 4.4 percent – a one percent increase in just three months. The difference that one percent can make over the course of a 30 year loan is significant for a homeowner who is financing a home purchase. Because a borrower has little control over the direction interests rate are moving, turning to other avenues that lower the cost of financing a home purchase makes sense. One avenue is purchasing points.
What Are Mortgage Points?
Mortgage points can be looked at as a form of pre-paid interest. Each point that you purchase is equal to one percent of the mortgage loan. If, for example, you take out a $200,000 loan, one point is equal to $2,000. For each point that you purchase, your interest rate will be lowered fractionally. The amount that your mortgage interest rate is lowered varies from one lender to the next; however, it is usually 1/8 to ¼ of a percent. If the interest rate you were originally offered on your $200,000 loan was 4.5 percent and you decide to purchase one point, your interest rate might be lowered to between 4.375 and 4.25 percent. If you purchase two points, at a cost of $4,000, your interest rate would likely be lowered to between 4.125 and 4.0 percent.
As a borrower, be sure that you understand the difference between mortgage points and origination points. While mortgage points will lower your interest rate, origination points will not. Origination points are calculated using the same formula; however, they represent a fee paid to the lender for processing your loan and nothing more.
Should You Purchase Mortgage Points?
Ultimately, only you can decide whether you should purchase points as part of your mortgage loan agreement. Some things to consider when making that decision include:
- Tax deduction – because mortgage points are essentially just a method of pre-paying interest when financing a home, the cost of purchasing those points is tax deductible.
- Monthly mortgage payment – anytime you lower your mortgage interest rate you also lower your monthly payment. Therefore, the more points your purchase the lower your payment will be each month for the life of the loan.
- Future plans – ask yourself how long you plan to remain in the home before making your decision. It takes many years to break even when you compare the cost of the points to the savings. If you only plan on being in the home for a short period of time, it may not be cost-effective to purchase points.
- Long-term – in the long-term, there is no doubt that purchasing points will save you money. Over the life of a mortgage loan, even a single point will ultimately save you thousands of dollars. Sit down with your real estate agent and/or lender and do the math to determine how much you will save and how long you need to live in the home to realize those savings.
As interest rates continue to rise, strategies that help lower your interest rate will become even more important. Take the time to discuss purchasing mortgage points with your real estate agent and lender to decide if that is a strategy that makes sense for you.