What are mortgage points?
Mortgage points are fees paid to a lender to reduce the interest rate you pay on your home loan. But how much do they cost, and are they worth it?
Sarah Harris
How to choose the right home loan for you
A mortgage is a legal agreement between you and a lender in which immediate funds are provided for a property in exchange for repayment of the loan with interest over time.
When you get a home loan, your property is used as collateral, meaning the mortgage lender has the right to foreclose on your house to recoup its funds if you fail to repay the loan according to specific, agreed-upon terms.
Mortgage types for homebuyers are categorized as conventional or government-backed and can be either conforming or nonconforming. Depending on the type of loan, you might have to choose between fixed or adjustable interest rates.
A home refinance loan, in which the borrower takes out a new mortgage to replace an old one, is a way to lower your interest rate and reduce monthly mortgage payments or to take advantage of equity and get cash (cash-out refinance).
A second mortgage is an additional mortgage that allows you to borrow money against your home’s equity. Home equity loans and home equity lines of credit are examples of second mortgages. Homeowners might take out a second mortgage to consolidate debt or to make home improvements.
Banks and other lenders offer conventional mortgage loans, which are not backed by the government. Conventional mortgage loans are classified as either conforming or nonconforming, depending on whether they conform to federal mortgage loan limits and terms set by the Federal Housing Finance Agency (FHFA) and Fannie Mae and Freddie Mac, government-sponsored enterprises that guarantee most mortgages in the U.S.
To qualify, you must meet an income limit requirement, typically equal to or less than the area median income. You need a minimum credit score of 620. Homeownership education is required.
Home Possible and Home Possible Advantage loans differ in the properties they finance, rate pricing adjustments, loan-to-value ratio (LTV) for each property and loan amounts.
When a government agency, such as the Federal Housing Administration (FHA), Department of Veterans Affairs (VA) or the U.S. Department of Agriculture (USDA), insures a home loan that is issued by a private lender, that mortgage is considered a government or government-backed loan.
All government-backed loans are within maximum conforming loan limits, which is $548,250 in most areas (up to $822,375 in high-cost areas) for 2021.
The conforming loan limit is $548,250 for most of the U.S. in 2021.
FHA loans are insured by the Federal Housing Administration. These mortgages are intended for low- and moderate-income homebuyers. FHA loan lenders are appealing to first-time homebuyers because they require lower down payments and credit scores than conventional loans.
VA loans are guaranteed by the Department of Veterans Affairs but granted by private VA lenders, like banks and mortgage companies. To receive this loan, you have to meet certain eligibility requirements set by the VA, primarily based on the type of service and length of time served.
USDA loans are designed to promote homeownership in rural areas. These loans are guaranteed by the U.S. Department of Agriculture and available for low- to moderate-income buyers to buy a single-family home in qualifying locations. They have low, fixed rates and flexible credit requirements. USDA lenders typically don’t require a down payment.
In 2021, loans of more than $548,250 (for a single-family home, in most areas) are considered nonconforming “jumbo” loans.
Nonconforming loans generally require larger down payments and come with higher mortgage interest rates than conforming loans. However, you can borrow a larger amount than with a conforming loan.
These loans are issued by private jumbo lenders, such as banks and other financial institutions. The private lenders set their own rules on requirements and approval and typically hold the loans as investments.
Jumbo loans, a type of nonconforming mortgage, are for amounts higher than the limits set by Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac.
Super jumbo loans are intended for buyers who want to acquire bigger and more expensive homes. The loan limits are higher than those of jumbo loans and carry fixed or adjustable rates. The down payment normally ranges between 10% and 20%. To qualify, borrowers must have large incomes and assets, excellent credit history and low debt-to-income ratios.
Fixed-rate mortgages are loans that have the same interest rate for the life of the loan. If you get a fixed-rate mortgage, you'll always pay the same rate until the loan is paid off in full. Most borrowers opt for fixed-rate mortgages because they are more predictable and stable. Fixed interest rates are best for borrowers who buy a home while interest rates are low.
Adjustable-rate mortgages (ARM) are home loans with interest rates that change based on market conditions. An ARM will have one rate for a period of time and then adjust based on market conditions and your loan agreement. Most of the time, adjustable interest rates fluctuate monthly, quarterly, annually or every three or five years.
For example, a 5/1 ARM will have a fixed rate for the first five years of the loan and then adjust once per year after that; a 7/1 ARM is fixed the first seven years and followed by yearly adjustments. Adjustable-rate mortgages are generally considered to be riskier for the borrower because of their volatility.
If a homebuyer wants to purchase a house that needs some work, they can borrow money for the necessary renovations at the same time they are taking out money to buy their house. Combining the loan needed to purchase a home with the loan needed to renovate the home is convenient. You can also get a renovation loan for a home you already own.
There are three types of renovation loans:
A 203(k) loan combines the purchase of a home and the cost of renovations into one loan — or you can use the 203(k) program to rehabilitate an existing home. The cost of the renovations must be at least $5,000, and the home value must be within FHA limits. You can use a 203(k) loan to make structural alterations, eliminate health and safety hazards, replace roofing, replace plumbing, improve energy conservation or enhance accessibility.
Fannie Mae HomeStyle loans provide funds to borrowers for renovations, repairs or improvements at the time of purchase or refinance. You work with a contractor to develop plans and then submit them to the lender for approval.
A ChoiceRenovation loan from Freddie Mac lets you roll the purchase price and renovation costs into one single closing transaction. ChoiceRenovation loans can be used with fixed- or adjustable-rate loan products.
A refinance loan replaces your existing mortgage with a new one. Home refinance loans are useful to homeowners who want to lower their monthly mortgage payments, reduce their interest rate or switch from an adjustable-rate to a fixed-rate loan. A cash-out home refinance loan allows you to borrow more than you have remaining on your principal balance and use the extra cash however you want.
Home equity loans and home equity lines of credit are types of second mortgages, which add another payment to your existing mortgage.
Here are the major types of home refinance loans and second mortgages:
Another type of mortgage is a reverse mortgage, which some older homeowners use to supplement their income. In a reverse mortgage, a homeowner gets a lump sum or regular payments from a lender in exchange for equity in their home. The loan is due back only when the borrower dies or sells the property.
For more information, read about the differences between reverse mortgages, home equity loans and HELOC.
The best type of mortgage for you is primarily based on whether you meet the eligibility requirement of a conventional or government loan, the type of interest rate you prefer and the total amount you need to borrow.
First, figure out how much you need to borrow.
Most mortgages have a fixed rate and a 30-year term.
Next, you need to determine if you qualify for a conventional loan or government-backed mortgage.
Depending on what type of mortgage you get, you might have a choice between a fixed or adjustable interest rate. Your interest rate will vary based on factors such as your credit history, the type of loan and the amount you’re borrowing.
Figuring out if you want a fixed or adjustable rate often comes down to what interest rates are available to you at the time of purchase. Depending on your finances, a lower initial rate on an ARM might not be worth it if it increases in a few years and you're not financially prepared to cover it.
Keep in mind that you can usually lower a fixed rate by shortening the length of time on the mortgage terms by five or more years.
Understanding the different types of mortgage loans available is an important early step in choosing the best home loan for you or your family. The best type of mortgage for you will depend on factors like your credit score, income level and loan term preferences.
If a traditional home loan isn't quite right for you, you can also look into owner financing. After you review the types of mortgages, you'll need to understand how to get a mortgage.
Make sure you also compare multiple lenders so you get the best rate on your new home. It’s a relatively easy process, especially if you work with an online mortgage lender.
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