Types of Mortgage Points
While trying to find ways to keep your Toronto mortgage costs low, you will come across the term, “mortgage points” in many instances. Having a little background information about the various aspects of a mortgage can help you save money and reduce your expenses.
A mortgage point is used to lower the interest amount of the mortgage over the course of the mortgage term by paying some amount of the loan before it is due. A single mortgage point represents 1% of the total Toronto mortgage loan amount. For instance, if you borrow $300,000, 1% of the loan amount would be $3000.
Mortgage points are of two types:
If you intend to live in your new home for a long time, then discount points can be very beneficial for you. These points are usually paid at the closing of the deal in order to get a lower interest rate. This low interest rate will then prevail over the entire term of your Toronto mortgage loan.
Lenders usually offer to lower your interest rate by 1/8%-1% when you pay 1% of the loan or 1 point. This will save you an ample sum of money over the years. However, if you plan to move from your home in a short period or opt for refinance, using discount points would not be as useful since the benefit is earned over an extended term.
To explain discount points in detail, have a look at this example:
You borrow $200,000 at an interest rate of 5%. Your mortgage payments, both principal and interest payment together, will amount to $1073. Incase, you have paid a discount point at closing, your interest rate will drop to 4.875 and you will only be liable to pay $1058. This will save you $15 monthly. Just imagine the amount of money you can save over the entire period of your mortgage.
These are premium points. Brokers usually charge the lenders and borrowers a service fee for processing Toronto mortgage loans. This fee is known as origination fee and is shown as a percentage of the entire loan amount. You should be cautious as some brokers may charge more without you being aware of it.
For instance, on a $200,000 loan, they may charge you 2 origination points. The two points will be equal to $4000. Although, this may seem quite reasonable as service charges, you should check whether your broker is earning some back-end points, also called Yield Spread Premium.
For example, if your broker offers you an interest rate of 6.2%, he might be charging your lender 1% of the loan as well. In turn, the lender will charge you a higher interest rate to cover the service fee of the broker. This way, you might end up paying more than you were required to.
It is important to understand and clarify any misconceptions regarding your Toronto mortgage contract at the time of closing. Minor points that you may miss out on can become big issues later on. Therefore, discuss everything with your closing agent before finalizing the deal.