Do You Understand Your Mortgage’s Fine Print?

Published

April 5, 2023

Scott Sheldon is a senior loan officer and consumer advocate in Santa Rosa, California. His work has appeared in Yahoo! Homes, CNN Money, MarketWatch and The Wall Street Journal. Connect with him at Sonoma County Mortgages.

When shopping for a mortgage, it’s critical to have a general understanding of how points affect your mortgage rate and payments, and ultimately connect to your bottom line. Below are some guides to help you identify your net tangible benefit on a home loan.

Points

When you pay points, you are paying a premium to buy the interest-rate down, thus lowering your monthly mortgage payment. In most mortgage scenarios, you have the choice to pay this point based on the interest rate, and other times you might not due to factors like loan-to-value, loan size, loan program, loan purpose, property occupancy or credit score.

A point is essentially1% of the loan amount. Also referred to as mortgage pricing, points can change daily until you lock in your loan rate. Some lenders allow you to lock your rate up front while others require your loan to be underwritten or have the home appraisal ordered prior.

No Points

This is the most common scenario for buyers, but your financial goals should dictate your decision. If lower interest rates over the life of the loan are better for your situation, paying points might be worth considering.

Basis Point Credits

When a particular interest rate generates an overage, a premium is paid back to you and applied toward closing costs. Here’s how it works:

Let’s say you’re looking at that 30 year fixed rate at 3.75%, but you want no points. The next day mortgage pricing deteriorates by 25 basis points making the rate 3.75% at .25% charge. If the 3.75% rate improves by .25% then that would be a credit as a function of your loan amount to pay the closing costs .

Mortgage Tip: Anytime you’re seeing a mortgage rate with any form of credit, it is based on the rate chosen for specific day in real time. Always review APR as the benchmark cost measure.

Determine Rates and Fees Consistent With Your Financial Goals

Ask yourself:

How long will you keep the loan or property for?
Do you plan to buy another property?
Is retirement around the corner?
Do you intend to pay the mortgage off in full?
Do you want to pay dollars today to line up the future?
Are the figures available based on your financial pictures consistent with any other goals you may have?

If you are uncertain about your short- and long-term financials goals, taking a conservative, low-cost, low-payment loan is usually a sound bet. An experienced mortgage professional can help you weigh costs versus benefits to determine which rate and pricing scenario best suits you.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.