When obtaining a home loan, you’ll receive two important documents from your lender: a loan estimate and a closing disclosure. On the surface, these documents are very similar, but they both serve different purposes. Here’s what you need to know about the differences between these two forms and what each means for you:
How Can Paying Points to Lower Mortgage Rates Benefit You?
Do you want to lower your Kansas City mortgage rate by paying points, but are not sure exactly what it does or what it will mean for you? By paying points, you are essentially “buying down” the rate of your mortgage. In other words, you are paying part of the interest upfront as a one-time fee in exchange for a lower interest rate. Each individual point is equal to one percent of the total amount mortgaged. Whether or not you should pay points depends on your unique situation.
Your Current Loan Purchasing Situation
There are many factors you have to take into account before paying points, such as:
- How long do you plan to stay in your home?
- Do you have the money to pay for the points?
- What is the housing market like?
How long do you plan to stay in your home?
The longer you stay in your home, the more you can save by purchasing points. Like refinancing, the costs outweigh the benefits if you don’t plan to stay in your home long term.
Do you have the money to pay for the points?
Also, if you are already barely able afford your down payment and closing costs, purchasing points can be more than you can afford. Rather than buying points, it may be better to save those funds for events like home repair.
What is the housing market like?
These discounts can also fluctuate with the market, so it’s important to remember to not to jump at the first opportunity you happen to come across. Since the market is always changing, you may or may not be able to get the money you put in back.
The Benefits of Paying Points
Since you are paying a chunk of your interest upfront, your interest rate can be lowered. This financial strategy ultimately reduces your monthly payments.
The points you pay could be eligible for a tax deduction, but there is a criteria for if those points will qualify or not. For example, the loan must have been secured for your primary home and the points must have been paid in the same year you filed your taxes in order to be eligible for a deduction.
There are also times when you can negotiate with a seller to pay for your points, just as you would as if you were to have them pay closing costs. This could save you money at the time of closing, depending on whether or not you plan to stay in your home.