Should You Choose Positive or Negative Mortgage Points?

While picking out a mortgage, you might be faced with the option of using positive or negative mortgage points, which can alter your interest rate and your closing costs.

But what are they? Which should you choose, if any?

Positive Mortgage Points

If you want to lower your interest rate, try paying an upfront fee at closing. This is known as buying positive points, where each point is equal to 1% of the mortgage.

One point typically knocks off about .25% of the interest rate. So if you have a $400,000 mortgage at a 6% rate, and you pay $4,000 upfront—1% of the mortgage, or one point – the interest rate will be reduced to 5.75%.

This means lower monthly payments. With a typical mortgage lasting 15-30 years, positive points can save you a good amount of money over the loan period.

You will also want to calculate how many months it will take you to recapture the pre-paid interest—otherwise known as “breaking even”. You will want to retain the mortgage for at least that long to make paying for those mortgage points upfront worthwhile.

Negative Mortgage Points

In contrast to positive points, applying negative points to a mortgage increases your interest rate but can reduce closing costs. For example, if you take one negative point, your lender might increase your interest rate by .25%—but give you 1% of the loan as a credit to help pay off closing costs.

The downside: even with reduced closing costs, you end up paying a higher monthly rate with negative mortgage points.

Weighing Your Options

Buying a positive point isn’t always a positive thing, and incurring a negative point isn’t always a negative thing. Depending on your financial needs and home-buying purpose, either one might work.

For example, positive points may be better for these situations:

• You plan to see out the entire mortgage (the house will be your “forever” home).
• You calculate exactly how long you need to keep the mortgage in order to break even—and will keep their mortgage at least until then.
• You have enough money to pay both the point cost and the closing fees—and have enough money in savings leftover.

Negative points may be better for buyers in these situations:

• Do not have enough money to pay the closing costs or would need to empty their savings to do so.
• Have large mortgages with high closing costs.
• Do not plan on seeing their mortgage through to the end (the house is just a starter home).

It’s always a smart idea to meet with your accountant or financial planner before taking on any additional costs for your new home.

If neither mortgage points option feels right for you—or does not meet your financial needs—ask your lender for another loan without any points.

Origin Article From: www.realtor.com | Written by: Craig Donofrio