What Do Mortgage Points Mean in the Lending Process?

A point in the lending world is one percent of the loan amount you are taking. You are probably most familiar with this term, though, through different forms of lender advertising.

Lenders let you know that you can get a specific rate by paying a certain number of points, or even for zero points. Mortgage lenders make money in a couple of different ways. One is by charging a higher interest rate.

The higher the rate, the more money lenders make from mortgage investors who wind up purchasing your mortgage. If, however, they price their loans too high, they become less competitive in the marketplace.

The other way mortgage lenders make money is by charging fees or, in our case here, points. They offer you a lower interest rate, getting less money from the end investor but make up for the money they get in points.

So why would you ever consider paying points when taking out a mortgage? The answer is that it may save you money in the long term.

The first question you want to ask yourself is how long you plan on being in the property. The longer you will be there, the more likely the savings.

One point paid will drop your interest rate approximately one-quarter of one percent. Let’s look at a very simple example.

We’ll say that you have a $150,000 loan and you decide to pay one point ($1,500) to reduce your payment by $22 per month.

To see the payback period, your calculation would be $1,500/$22. This tells you that it would take 45 months, or just under four years, to pay back the point you paid for.

Please reach out if I can answer any questions you might have about how points work. I’m here to help, and I’m just a call or email away.

How Do Forbearances and Deferments for Mortgages Work?

Homeowners who are having challenges making their mortgage payments will often have several options to get them back on track.

First, it is best to be talking with your lender as soon as you know that you’ll be missing a mortgage payment.

Lenders really don’t want your home back and would rather work out terms with you so you can keep it. It is expensive for them to maintain a home, then go through the process of selling it, then hope they can sell it for more than you owe them.

Two of the options that lenders may offer you if you’re behind on your mortgage payments are what are called forbearances and deferments.

Forbearance: This is where the lender lets you make either reduced or no payments for a specific period of time. At the end of that period, you would be asked to catch up on all of the missed payments. Depending on the arrangement, this may be due as a lump sum at the end of the forbearance period or may be able to be paid over time.

Deferment: A deferment works similarly to a forbearance in that you’ll be able to skip a number of payments before resuming them. Here, though, you may be able to enter into an agreement with the lender to put the missed payments onto the end of the loan.

If you have any questions about asking your lender for either a forbearance or a deferment, please give me a call and I’d be happy to answer them.