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Points vs. Credits | How they Affect Your Monthly Mortgage Payments Texas

Many things need your consideration when applying for a home mortgage in Dallas, Texas.

 Remember, lack of information can put you at a higher risk of choosing the wrong mortgage type, and you will end up paying more than what you have anticipated in the first place. 

Many mortgage companies in Dallas Texas, can guide you in detail if you face any difficulty during the deal. So don’t hesitate to seek professional advice whenever required.  

Among the different factors you will encounter during your deal are mortgage points or lender credits. You need to have explicit knowledge of these two as only then can you figure out which one to choose and proceed with. 

Mortgage Points

Mortgage points are also called discount points. They play their role in lowering the interest rate when you exchange for a fee. Mortgage points assist in reducing the interest amount up to 0.25%. The cost of the mortgage points is 1% of the total mortgage amount.

Advantages

  •         It lowers your monthly payments
  •         The reduced interest rate eventually lowers the total loan cost
  •         You can buy the mortgage points at the final stage of buying a house
  •         You can purchase the mortgage points by a process known as “buying down the rates”
  •         Mortgage points are tax-deductible and can reduce the tax bill

Disadvantages

  •         Purchasing mortgage points will not be a cost-effective option for those who are planning to own the home for a short time only
  •         It will require a significant upfront cost
  •         It does not suit every person because they may find it difficult to pay at the point when they have already invested enough

Lender Credits

They are quite similar to the mortgage points in a way that they also offer you to adjust the upfront cost and the interest rate. 

The difference here is that, rather than lowering the interest rate, credits lower the closing cost in exchange for a higher interest rate

Contrary to the mortgage points, lender credits are not standardized. They can vary from one lender to the other. In some cases, you can completely eliminate your closing cost using the credits.

Advantages

  •         They are effective in removing obstacles in the way to homeownership by reducing the closing costs
  •         Lender credits are effective to free money for large down payments
  •         Contributes towards a massive annual tax deduction 
  •         Being less standardized, you can get a great margin sometimes while shifting from one lender to the other

Disadvantages

  •         Require you to pay more money in the long run due to higher interest rates
  •         Will reduce the amount of leftover money in your budget
  •         Results in higher monthly payments
  •         It will negatively impact your DTI by making you pay more in terms of monthly payments

Calculation of Points and Credits

The mortgage points are calculated as a percentage of the total loan amount, and it can be stated as 1 point equals 1% of the entire loan.

The lender credits are also calculated as a percentage compared to the total loan amount. There is a possibility that a lender might offer incentives to increase points or decrease points. 

The scenario will be based on the option you select and depending on several circumstances, like promotional offers, etc.

Every lender has a specific pricing structure, so different lenders offer the same rates at different prices.

Which one to Choose? Points or Credits

Both options, either mortgage points or lender credits, allow you to save money differently. Mortgage points will enable you to reduce the interest rate by raising the closing costs. Usually, if you plan to own the home for a long time, mortgage points will end up in big savings.

On the other hand, lender credits help the borrower to save money in the short term. The option frees up cash flow. This eventually assists you to put down a big down payment, pay for home improvements, and more.

Mortgage points are best for those borrowers who can afford a higher upfront cost but seek to save money over the long term. 

On the contrary, the lender credits are best for those borrowers who prefer a lower upfront cost, and they may end up in greater savings if you plan for a short time house ownership. 

Given the increased cost of buying a home, lender credits can help lower the entry barrier between the down payment and closing costs, making homeownership more affordable and accessible.

Final Words

Mortgage dealing is indeed a sensitive issue. 

Both points and credits have their own pros and cons. It entirely depends on your financial situation, ability to pay back your loan, and preferences. 

Always be careful throughout the dealing time. Carefully, consider all the details, including your budget and convenience, and then decide accordingly.

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