A mortgage loan point is a unit by which you can calculate how expensive or inexpensive a mortgage loan will prove for you. Mortgage loan points help in assessing the interest rate charged for a loan and they also help in identifying the reasons behind a rise or fall in the interest rate.
For example, whenever the interest rate falls by one point, it will represent a reduction in the risk involved in the transaction. Similarly, whenever the interest rate rises by one point, it is believed that the risk will be increased.
There are certain points which can be purchased. You have to make a down payment on your loan which will naturally reduce the interest rate you have to pay on your mortgage loan. These points are therefore called discount points and their cost varies according to the required loan amount when applying for the loan. A mortgage point is also considered to be equal in value to 1% of the mortgage loan's amount.
Different mortgage lenders follow different guidelines for considering an application for a loan; but some factors like the ratio between the loan and the value, credit history, and the amount of down payment decide whether the lender will require points for your loan.
There are some things to remember. The interest rate cannot be reduced or increased beyond a limit. It depends on the type of mortgage loan required and the lender providing the loan. Usually four points are given on a common mortgage loan. You can divide these mortgage loan points into fractions because sometimes the interest rate reduces or increases by just half a point or a quarter of a point. Thus, half a mortgage point can also be obtained to get an interest rate reduction.
Always remember: when choosing a mortgage loan you should inquire about how much the rate of interest is reduced by the points you'll pay and how much will it lower the amount of your monthly payment. You can put all this information into a mortgage calculator and can calculate the amount of money you'll save in interest for the duration of the loan.
In some situations, you can benefit by paying points on a mortgage loan. You can negotiate these points to get better terms on your loan if you have good credit and an appropriate balance in your bank account.
Mortgage loan points will assist you in taking the right mortgage at the best possible rate. All you need is information and the application!