Each mortgage lender determines
what rate of return they want on their money each day. In a volatile marketplace, interest rates change
during the day—often very quickly!
Regardless
of which rate of interest you choose for your new loan,
the lender is going to receive the rate of return it wants!
If you choose a rate of interest that matches the rate being
required by the lender then, obviously both parties are
getting the rate each desires. However, should
you choose a rate of interest that is lower than the rate the
mortgage lender is requiring, the lender must make an
adjustment in order to turn your chosen rate of interest into
the actual rate the bank wants.
Discount points are the
mortgage lender’s tool for adjusting a borrower’s
chosen rate of interest on a new home loan into the rate of
return the bank is requiring on their money.
A full discount point is 1% of your loan amount. Discount
point charges are one-time up-front fees paid at the closing
table and are typically quoted in 1/8th point
increments; .125%, .25%, .375%, .5%, .625%, .75%, .875%
etc. Discount point charges are multiplied by your loan
amount— say you choose a rate of interest that requires you
to pay a ¼ point, or .25% x $100,000 loan amount = $250.00 to
be paid at the closing table.
Continue reading about Discount Points 2
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