Should you divert funds from your down payment to get better terms on your monthly payments? Or should you go the opposite direction and add to your equity? How about getting cash back at closing? These are all things that you can do by adjusting the level of discount points that you agree to pay at the start of your new home loan.
Purchasing A Discount On Your Home Loan
The American system of mortgage lending and home lending is unique because of one valuable feature: The ability to pay points in advance, to control the repayment interest rate. By setting up a payment at the start of the loan period, lenders and borrowers have the flexibility to negotiate terms where they might otherwise not be able to come together in agreement on prices and other details.
The more you pre-pay as points, the lower the interest rate that your lender will allow. Conversely, if you are willing and able to withstand higher payments but you have little or no cash for your down payment, you can use negative points to supplement your deposit. Depending on what your lender offers, one point is equivalent to about a quarter percent in interest on your loan.
Your Discount Points Options
So, do you pay discount points? Or finance without points or do you go negative? A point is worth the equivalent of one percent of your loan and a discount for points will reduce your payments over the long term. Points are tax deductible and down payments are not.
If you put the funds into down payment instead of discount points, it could allow you to avoid buying private mortgage insurance. Depending on how close you are to gathering the cash for a substantial down payment, you may want to use negative points to get to twenty percent of the sale price. It will mean that you do not have to make monthly PMI payments, which will save you significantly on your monthly payment.
Going Negative On Points
Negative points might add a quarter of a percent to your rate for each negative point that you take, but it could give you the funds to increase your deposit or pay for closing costs. Negotiating the points you pay is one of the tried and true techniques that investors have been using for years, and it has the potential to secure investment properties or as your home.
However, it does hold moderate risk; if you intend to stay long-term, you will save money on monthly payments by refinancing as soon as you have the equity to do so. The experiences of the last dozen years in real estate show the extremes at both ends; we can see that the market can boom, or in the worst case, the market can collapse.
The uniquely American feature of discount points in real estate finance is an option that has more flexibility than most borrowers realize; you can negotiate the points you pay, not pay them at all, use them more creatively to secure the property that you want. Use home loan discount points to your advantage and you are one step closer to being the master of your real estate realm.