Life Insurance Quotes Canada: Have You Been Offered Discount Points for Your Mortgage?

Discount points are a confusing topic for many new borrowers. The basic explanation of paying discount points is that you are paying part of your interest to the bank in the beginning in order to lower your mortgage payments later on, during the course of the loan. Obviously, a reduced rate will mean a lower monthly payment.

One point equals 1% of the loan, and it is remitted to the lender at the closing of the mortgage. For a $200,000 loan, one point would be $2,000. A borrower has the choice of paying one or more points on the mortgage.

Your home loan rate is determined primarily by your credit worthiness, but whatever the rate on the loan, paying points will make it lower. A buyer who was quoted 6% based on his credit rating, will receive a series of other quotes based on points. A general rule, but one that can change from bank to bank, is that one point will lower the loan rate .25% on a fixed rate loan and .375% on an adjustable rate loan. In the case of your $200,000 mortgage that you are willing to pay $2,000 for one point, your loan would then be reduced to 5.75% for a fixed rate loan and 5.625% for an adjustable rate mortgage.

Most loan quotes are automatically given with the point quote. In other words, the quote may be 6%, 5.75% (1 point), 5.5% (2 points), etc. Next you may see 7%, with the appropriate rate reductions per point, and so on for each rate. This is why it is necessary to know your original rate and then calculate the reduction for points.

It is clear that a monthly loan payment will be lower with a loan of 5.75% than with a loan of 6%, but you have to consider the points. Lowering the rate in this way is because you are really paying some of your interest beforehand. This is why it is important to examine points with a view to how long you plan on living in the house. You have to spread the cost of the points over the time you plan on living in the house.

Since a home buyer is going to have a lower mortgage payment, this will mean that he can afford to pay more for a house. This is why you may see homes advertised with a notice that the seller is willing to pay points. But this shouldn’t change the initial calculations, because the price of the house will reflect the seller’s contribution.

Borrowers do not have to pay points, they do it if they are interested in lowering the rate. It’s a decision that a buyer can examine depending on many of the other factors in the mortgage.