| |  | | Closing The Deal | Getting prepared for the purchase of your new home can be very stressful. It is important to learn as much as possible about the process and eliminate possible surprises. Once you find the home you want, make the decision to purchase, and are approved for a mortgage loan, it is time to go to settlement, or closing.
There are many costs connected with closing, and one of the most important is the points. Points, also known as a loan discount, are often the largest of your settlement costs. A point, usually one percent of the loan amount, is the interest you pay on the loan up front to make the yield on your loan more profitable to the lender. The number of points you pay varies depending on the type of loan you have and the total amount of mortgage interest you will pay over the life of the loan. If you have a Veterans Administration (VA) loan, the maximum you can be charged is one point. So if you are borrowing $90,000, the most you would have to pay is one percent, which equals $900. For Federal Housing Administration (FHA) and conventional loans, the number of points you pay can be much higher.
The more points you pay up front, the less interest you will have to pay over the life of the loan. Over the course of a 30-year loan, each point you pay at closing reduces your interest rate by roughly 1/8 of a percent. Initially, this may not seem like much, but over the life of a loan, it can result in big interest savings.
With all the costs incurred during settlement, you will have to decide if you want to pay more or fewer points during closing. If you do not have a lot of cash for settlement, you'd probably be better off getting a loan with fewer points and higher monthly payments. If points are paid separately and not subtracted from the loan amount, they are tax deductible. Be sure to consult you tax advisor for more information.
Sometime during the application and settlement process, the points and mortgage interest rates are locked in. Some lenders will lock in the interest rate and points either at the time you apply or when your loan is approved. Be aware that some lenders charge a non-refundable fee for locking in points and interest rates. Some lenders will lock in the interest rate on the loan and let the points float. Other lenders will allow points and interest to rise and fall with the market until the time of closing. In this instance, the buyer could pay more or fewer points, depending on what the interest rate is when you go to closing.
Your real estate agent or loan officer is required to give you a good faith estimate of all the closing costs you will incur in making your new home purchase. Find out as much as possible. Shop around with different financial institutions to find out what options are available and choose the one that best fits your spending plan so you can take advantage of today?s low interest rates.
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