Understanding Today’s Mortgage Rates: Breaking Down Loan Officer Terms
If you're shopping for a mortgage, you may have come across terms like “7.125 zero points” or “6.75 1 pt.” While they may seem confusing at first, understanding these terms can help you make informed decisions about your loan. Let’s break down what these numbers mean and how they impact your mortgage.
What Are Mortgage Points?
Mortgage points, also known as discount points, are upfront fees paid to the lender to reduce your mortgage interest rate. Each point typically costs 1% of the loan amount. By paying points, you can “buy down” your rate and save on interest over the life of your loan.
For example:
If your loan amount is $300,000, 1 point would cost $3,000.
Paying that $3,000 upfront could lower your interest rate, potentially saving you thousands over time.
Zero Points vs. 1 Point: How Does It Work?
When a loan officer quotes rates, they often provide options with different combinations of interest rates and points. Here’s an example:
Conventional Loan Example
7.125% Zero Points: You pay no upfront cost for points, and your interest rate is 7.125%.
6.75% 1 Point: You pay 1% of your loan amount upfront (e.g., $3,000 for a $300,000 loan) to reduce your rate to 6.75%.
By paying the point, you’re effectively trading a higher upfront cost for lower monthly payments.
FHA and VA Loan Example
6.5% Zero Points: With no points paid, your rate is 6.5%.
6.125% 1 Point: Paying 1 point upfront lowers your rate to 6.125%.
This can be a good option if you plan to stay in the home long enough to recoup the upfront cost through monthly savings.
Why Points Matter
Points can make a significant difference in the overall cost of your loan. Let’s say you’re financing $300,000 for 30 years:
Zero Points (7.125%): Your monthly principal and interest payment would be approximately $2,016.
1 Point (6.75%): Your monthly payment would drop to about $1,946, saving you $70 per month.
Over time, these monthly savings add up. However, it’s important to calculate your break-even point, which is the time it takes to recover the upfront cost of points through monthly savings. In this example, if you paid $3,000 upfront and save $70 per month, it would take about 43 months (just under 4 years) to break even.
Tips for Understanding Loan Officer Language
Here are some common terms and their meanings:
Zero Points: No additional cost to lower your interest rate.
1 Point, 2 Points, etc.: Refers to the percentage of the loan amount paid upfront to lower the rate (e.g., 1 point = 1% of the loan).
APR (Annual Percentage Rate): The total cost of borrowing, including interest and fees.
Buydown: Paying points to reduce your interest rate.
Questions to Ask Your Loan Officer
When discussing rates and points, ask your loan officer:
What is the cost of each point?
How much will it lower my monthly payment?
What is the break-even point for paying points?
Are points refundable if I refinance or sell my home?
Bottom Line
Understanding how points work and what today’s rates mean can help you choose the right mortgage for your financial goals. While paying points can lower your interest rate, it’s important to consider your budget, how long you plan to stay in the home, and the upfront costs.
If you have questions about rates or points, I’m here to help! Feel free to reach out for a personalized consultation to explore your mortgage options.
