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Mortgage lenders
offer their entire mortgage program inventory to borrows with several options including
whether the borrower wants to pay up front "Points" or not. A "Point"
is a fee equal to 1 percentage of the principal amount of the loan. If the borrower
decides to pay any "Points"up front, the lender then LOWERS the interest rate on
the loan. The borrower can elect to pay 1,2,3 or 4 points depending on how much the
borrower wants to lower the interest rate by. As example, if a borrower is
borrowing$100,000 and elects to pay 1 "Point", he would pay the lender $1,000 (
1% of $100,000) at closing and the lender would reduce the interest rate on the loan.
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Paying
"Points" to Reduce Interest Rate on Loan |
Using a $100,000 Loan Amount with a
Fixed Interest Rate with regular Principal and Interest monthly payments. |
|
Savings in Interest at End of: |
# of Points |
Cost to Borrower Up Front |
Interest Rate Reduction on Loan |
Monthly Interest Payment Reduction |
Yr 1 |
Yr 2 |
Yr 3 |
Yr 4 |
Yr 5 |
Yr 10 |
Yr 20 |
Yr 30 |
1 |
$1,000 |
.125% |
$10 |
$125 |
$250 |
$376 |
$501 |
$625 |
$1,243 |
$2,343 |
$2,884 |
1 |
$1,000 |
.25% |
$21 |
$251 |
$500 |
$751 |
$1,001 |
$1,250 |
$2,483 |
$4,675 |
$5,752 |
1 |
$1,000 |
.375% |
$31 |
$376 |
$750 |
$1,126 |
$1,501 |
$1,875 |
$3,721 |
$6,997 |
$8,602 |
As you can see from the table above, if you pay the lender 1 point up front at the closing
of the loan, you would pay $1,000 per $100,000 loan amount to the lender. The lender would
then reduce the interest rate on your loan by 1/8, 1/4, 3/8 or 1/2 of a percentage point.
You can see that if the lender lowers the interest rate on your loan by 1/4 or .25%
you would save $21 per month in interest, $251 by the end of the first year, $1,250 by the
end of 5 years and $5,752 over the 30 year life of the loan. This means that after 4 years
into your mortgage loan, you would start saving interest because you paid the $1,000 up
front to lower the interest rate by 1/4 of 1%. |
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If you do not wish to lower the interest rate on the loan because you do not expect to
keep the house for as long as it would take to recoup the $1,000 per $100,000 you pay up
front in the lower interest rate...than you can ask for a No Point Loan.And, if you want
to lower the amount of cash you are expected to pay at the closing of the loan, you can
ask that all "Fees"and/or "Closing Costs" be rolled into your loan's
principal amount. As example, if you need to borrow $100,000 and the "Fees" and
"Closing Cost" you are quoted by the lender total up to $3,000, you can ask to
have them include din the loan making the principal you are borrowing $103,000. This means
you are asking to "Finance" the "Fees"and "Closing Costs".
By using a sample 6% fixed interest rate on a $100,000 loan....instead of paying $599.55
per month on the original $100,000 loan, you will be paying $617.54 per month on the
$103,000 loan which includes the "Fees"and "Closing Costs". At the end
of 12 months, you will be paying an additional $179 in interest on the $3,000 you are
financing and at the end of 4 years, financing the $3,000 would cost you an additional
$701 in additional interest payments.
This means that if the borrower does not have the extra cash available to pay the
"Fees" and "Closing Costs"on a mortgage loan, he or she can
"finance" those expenses at an interest rate that should be lower than borrowing
the funds else where, since the rate would be the interest rate on the mortgage loan.
However, most lenders are going to insist that the borrower has good credit scores and
credit history before the lender allows the fees and closing costs to be included in the
loan amount.
You are invited to ask for more information by emailing us at
NoFeeLoan@mortgage2USA.com
Or use our "Visitor Info Request Form".
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