Home Purchasing, Pre-approval, First Time Buyers, News

What Are Points and Credits?

Are you negotiating for your dream house and trying to figure out the best mortgage that will get you the house you want? Mortgage points and lender credits can help you out. Here’s what you need to know.

What Are Mortgage Points?

Do you want to lower your monthly payments? You can do so with mortgage points. Mortgage points are fees you pay your lender at closing in exchange for reducing your interest rate. This is called “buying down your rate.”  They are sometimes also called discount points.

How Much Do Mortgage Points Cost?

In general, one point will cost 1% of your mortgage amount. So, if your mortgage is for $200,000, you will be paying $2,000 per point. This can reduce your APR and monthly payments by a small percentage (the exact reduction depends on the lender and marketplace). It’s important to figure out how long it will take to recoup the cost of buying mortgage points. In other words, when will you break even?

Here’s how to find out: Divide the cost of your mortgage points by how much you’ll save each month on your payment. The resulting number will tell you how long it’ll take for your points to equal your monthly savings.

What Are Credits?

Lender credits are another term you’ll hear when shopping for a mortgage. They can assist you in covering closing costs, which is great, because closing costs can add thousands of dollars to the purchase price of your new home. Your lender may offer you a credit to cover most or all of the closing costs and apply that credit to your mortgage. This helps many homebuyers who are facing higher closing costs than they anticipated.

What Will Credits Cost Me?

Lender credits cost nothing upfront—after all, they’re saving you money upfront. The tradeoff is that there will be an increase in your interest rate. Usually, this increase is a fraction ranging from an eighth of a percent to a quarter of a percent. This is a small amount, but it can add up over time, so you should weigh the costs: would you rather save money upfront or save it in the future?

Depending on your unique situation, mortgage points or credits may be exactly what you need to successfully finance your home purchase. Get in touch today to learn more about how Loan Cabin can make your home buying process easier!

WRITTEN BY: Massimo Ressa