Mortgage rates are influenced by many factors, including the state of the overall economy, treasury 10-year bond prices, debt markets, and the Federal Reserve Board’s monetary policy, all of which change over time. As these factors fluctuate, so do mortgage rates.
Discount Points can directly affect your mortgage rate. Discount Points are fees that you pay directly to your lender at close in exchange for a lower interest rate over the life of your mortgage. As a result of this one-time payment, also known as a prepaid interest payment, you will have a lower monthly mortgage payment.
The cost of each Discount Point is equal to 1 percent of the principal loan amount. Therefore, if your principal loan amount is $200,000 mortgage, one Discount Point would equal $2,000. It is possible to break Discount Points into fractions; for example, if your principal loan amount is $200,000, 1.50 Discount Points would equal $3,000.
Whether paying Discount Points makes sense in your case depends, in part, on how long you plan to stay in your home. To help you decide whether you should include Discount Points as part of your loan process, use these steps when calculating your mortgage:
- Calculate the amount of your monthly payment at the interest rate you would be charged if you do not pay Discount Points.
- Calculate the amount of your monthly payment at the lower rate if you were to pay Discount Points.
- Deduct the lower payment from the higher payment to find the amount you would save each month.
- Divide the amount charged for Discount Points at closing by the amount you would save each month. The result is the number of months you would have to stay in your home in order to reach the break-even point on on paying Discount Points.
Taxes and Insurance
Your mortgage payment will also likely include taxes and insurance. If these are paid as part of your mortgage payment, they will be paid through an escrow account.
Property taxes are levied by your community and are calculated as a percentage of the value of your property. They are usually used for local costs such as schools, roads, and public services. Determining the taxes you will have to pay on your property is a fundamental part of the home purchase process, and you should keep this amount in mind as you consider how much of a mortgage payment you can afford.
In order to obtain a mortgage, most lenders require that you have a home insurance policy in place, which covers your home and personal property against fire, theft, and other damage and losses. If your property is located in a special flood hazard area, you will be required to carry flood insurance, as well.
There are also cases in which you will be required to obtain additional insurance before being eligible for a mortgage. If you put down less than 20 percent on a conventional loan, also known as a conforming mortgage, your lender will probably ask that you get Private Mortgage Insurance (PMI) until you have made two years' worth of payments or your principal balance is reduced to 78 percent of its original amount. This PMI protects the lender in case you default on the mortgage. If you select a loan backed by the Federal Housing Administration (FHA), you’ll also have to pay mortgage insurance. This functions the same way as PMI, except that you must make payments for 11 years or the life of the loan, depending on your terms.