How to Understand Points, Rates and Fees

You have to understand what type of mortgage you should choose and understand the costs associated with your mortgage. All costs will be paid upon closing on your mortgage.

Purchase points, also known as a buy-down or discount points, are a up-front fee paid to the leader at closing to lower your interest rate over the life of the loan. Every point is equal to 1% of the total loan amount. For a $100,000 loan, one point would equal $1000. The more points you’re able to buy, the lower your interest rate will be and the more money you’ll need at closing. This is how you can determine if you should buy points and, if so, how many. Your decision should be based on how long you plan to live in your home and what you can afford to pay each month toward the mortgage. If you are going to live in your home for more than five years, it’s probably a good idea to purchase points. The longer you live in your home, the more you can save on interest over the life of the loan.

You are charged an interest rate when you get a mortgage. The rate the lender charges you for using their money is the interest rate. The higher the interest rate, the higher your monthly payment will be. Interest rates change constantly. Sometimes rates change daily or even hourly. If a lender quotes you an interest rate, that is not necessarily the rate you will get when you close on your loan. You have to formally lock in that rate with the lender to insure you will get the quoted rate at the time of closing. Generally, lenders will allow you to lock in your rate quote for 15, 45 or 60 days. The longer you take to lock in, the more expensive it will be since there’s more of a risk to the lender.

Fees are associated with getting a mortgage. These fees cover the cost of processing and underwriting the loan. Fees can include charges for ensuring the title to the home is free and clear, paying for land survey or paying for a home appraisal which will give you the estimated value of the property. Home appraisals are required to close on your mortgage. Different lenders may charge different amounts. Some lenders may charge lesser closing fees to lure you in but they may charge you a higher interest rate. This means you will pay more in the long run. Everyone has different needs and you may or may not be able to afford to pay more at closing and be willing to pay more over the long term of the loan.

Do your homework before it comes time to close and make sure there are no hidden fees. Ask your lender many questions so that you perfectly understand all the costs involved with your mortgage. You may want to consult with your tax advisor, also.