Last week we explored the basics of home mortgages through key terms. This week, we’d like to dig a little deeper into reducing your monthly mortgage payment in two ways. This article from Realtor.com really aids in breaking down the difference between down payments and discount points considering that they both will essentially lower your monthly mortgage payment but in two very different ways. But which will give you more bang for your buck?
As we discussed last week, the monthly mortgage payment is calculated using the loan amount, interest rate, and the term or duration of the loan.
The down payment is the initial lump sump of money presented at closing and is directly applied to the balance of your mortgage. You are essentially paying a chuck of your principal mortgage amount up front reducing the amount of your loan. The more money you put down, the less you owe on your home which reduces your monthly payment.
Paying Discount Points
1 pt = 1% of your loan amount. Purchasing points allows you to pay an upfront fee to lower your interest rate. Also this can also be considered a nice tax deduction.
To determine whether this decision will be profitable to you as a consumer, there are a few basic calculations in order.
- Decide how many points you would like to pay.
- Calculate the new monthly loan payment amount using the reduced interest rate
- Subtract that monthly amount by the original monthly loan amount to get the monthly savings
- Divide the cost of purchasing point(s) by your monthly savings to see how long it would take to break even on your purchase
Basically, the longer you stay in your house, the more profitable it becomes to purchase points. If you are purchasing your dream “forever” home, this may be the path for you. However, when you invest in a larger down payment, it lowers your monthly payment without being affected by the length of time you intend to keep your home. So for individuals or families looking for a starter home purchasing points may not be a smart financial decision.
In all, it is important to stay informed, do a little research and calculations before making any major decision regarding your home mortgage but we hope that we were able to make those decisions a little easier today! To view the article in its entirety from Realtor.com click here.
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Home Run Real Estate Team