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No Cost Home Mortgage Loans Versus Paying Points for a Lower Interest Rate

Points are fees that equal to a percent of the loan amount. One point equals of the loan amount. Points include discount points (loan discounts) and origination points (loan original fee). Points are usually paid to the lender, mortgage broker, or both, at the settlement or upon the completion of the escrow. Origination points are fees charged by the lender for evaluating, preparing, and submitting a proposed mortgage loan. They are often expressed as a percentage. Many consumers are making a prudent decision by not adding closing costs to their mortgage debt.

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The era for no cost home mortgages has arrived. The Consumer Finance Protection Agency has implemented new rules for financing that benefit consumers. The new mandates encourage lenders to pass on discounts to borrowers through mortgages with no closing costs or fees. The "lender paid fees" are factored into the interest rate rather than the brokers' compensation.

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Discount points are additional money you can pay at closing. If you pay more points it will lower your interest rate. "In general, you can knock off about 1/4 to 1/8 of a percent off your interest rate for each point you pay," says Keith Gumbinger, vice president of mortgage information provider HSH Associates. The 1/4 to 1/8 percent savings to which Mr. Gumbinger is referring is for a 30-year fixed-rate mortgage. The savings can be .25 to .50% on a 15-year fixed-rate mortgage.

How to Get a No Cost Mortgage Refinance Loan

Because points are interest payments, they are tax-deductible in most cases, unless you are refinancing. In that case, points may be deductible, but only for residents of North Dakota, South Dakota, Nebraska, Minnesota, Iowa, Missouri and Arkansas.

How long do you plan on keeping the loan? Lower interest rates usually require you to pay closing costs and points. But, paying points can be good if you plan on living in the home for a long. The following from shows the savings you can expect by paying two points on a $150,000.000 mortgage over the course of 30 years, assuming it's a fixed-rate loan.

Are you moving, or do you think you will need cash later on?
If you don't plan on staying in the home for long, paying points upfront won't benefit you. You may want to consider 100% financing through an 80-20 loan or other no-down-payment program. If you think you'll need cash later on, paying points upfront won't help you either because refinancing will replace your existing mortgage with a new one and you'll lose the savings of pre-paying the points.

Article was written by M. Nyce. She writes home loan and finance articles for mortgage banks across the country. She recommends the Nationwide Mortgages: Get fast mortgage loan quotes from our lenders direct. If you need more loan advice about first home buying and home equity loans. For no money down home financing, please visit the Home Loan Programs.

Will Zero Cost Home Loans Continue to Soar in Popularity? Chances are they will, because when interest rates begin to rise, borrowers will be less inclined to pay closing costs. We are hearing that more and more people are requesting no cost purchase loans, especially in high cost zones like California and New York.

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