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"Do you want to pay points?" is the kind of mortgage question that leaves many people thinking "I dont even know what that is!" Heres a simple explanation. Points are pre-paid interest. You pay interest now (which is frequently tax-deductible) to lower your long-term rate. "One point" is 1% of the total loan amount. If your lender is willing, ask to compare a loan package with 0 points to options with 1, 2 or more so you can see the short-term and long-term effect. As an example and general guideline, on a 30-year mortgage, your interest rate will go down by about 1/8 (0.125) for each point paid -- 3% interest would drop to 2.75% with 2 points paid. If you plan to stay in the home for a while, points can reduce your monthly payment, while the up-front tax deduction might help with first-year finances. PRO TIP: In some market conditions, negotiating to have the seller pay points may be an option. Talk with your real estate professional and lender.
This short video summarizes the main kinds of mortgages available for home buyers: Adjustable Rate Mortgage, commonly called “ARM” Fixed-Rate Mortgages Balloon Mortgages 2-Step Mortgages ARMs, as the name suggests, will change over time. As market interest rates vary, the mortgage interest rates and payments will vary with them. Buyers opting for ARM loans take on responsibility for meeting payments even if interest rates go up significantly. Fixed rate mortgages lock in interest rates for the entire loan. If the interest rate on a fixed-rate loan is higher than an ARM today, the rate and payments will not change in the years to come. Balloon mortgages are sort of “shaped like a balloon” — smaller at the bottom, bigger at the top. In financial terms, balloon mortgages provider lower interest rates for the early years of a loan — usually 5 years, 7 years, or 10 years. Then the balance and interest are adjusted and refinanced, which sometimes requires a large ‘balloon’ payment. Two-Step mortgages are like super-simplified ARMs. Interest rates adjust, but only one time. Other options for mortgages are available, and worth investigating for your particular situation. For veterans, VA loans are a frequently a great option; see the VA loan series on this site for additional details. Other government programs for non-veterans may also be available. Real estate professionals and lenders can help you make sense of the current market and the options that might suit you best.