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Health & Fitness

McCue Mortgage Minute: What Are "Points" on your Mortgage?

You always hear “You can have an interest rate of 4.25% with 1.5 points” or “5% interest with no closing costs”.  Points are Fees added onto the mortgage’s closing costs; and they are not always bad.  1.00 point is equal to 1.00% of your Loan Amount, simple as that. So, if you have a loan amount of $150,000, and you need to pay 1.00 point for your interest rate, you would have to pay $1,500 on top of your other closing costs (attorney fees, etc.). 1% of $150,000 = $1,500.  Usually, the LOWER the interest rate, the MORE points is the Rule-of-Thumb, so shop around.

On the plus side, if you do NOT have a lot of money saved up, a lender or broker may increase your interest rate to give you a “credit”.  The credit is basically “negative points”; money credited to you to lower your closing costs.  That is called the “Lender Credit”.

Be aware though.  Sometimes, you will hear about someone advertising “No Closing Costs” or a closing cost discount for your occupation (i.e. Firefighter, Nurse, etc.).  Basically, what they are doing, is raising your interest rate, away from the best rate you could have, and they will credit you the closing costs money.  So even if you have money saved to attain the lowest monthly payment, they’ll give you a worse interest rate to lower you closing costs, because you are focusing in on the closing costs side of the equation.  Don’t be fooled.  The only legitimate discount for your occupation should be a lower Interest Rate, as long as the points advertised are staying the same as before.  If it’s different, walk away, because that company is trying to pull a fast one.

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Have you seen any of these practices around?  I would love to hear your thoughts or experiences.

Keith Turner

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