What are "Points?"
How is the interest rate determined?
How is my monthly payment determined?
When should I apply for a loan?

What are "Points?"

Points refers to percentage points of the loan amount. Usually,
one point or more is charged as a loan origination fee to compensate the
loan company and loan agent arranging your loan. These are called
"Origination Points." Also, additional points or partial points may be
paid to lower the interest rate from the "par" rate, with "par" being
the rate achieved by paying only one "point." These are referred to as
"Discount Points," since they can lower your interest rate. When you
hear the term "zero points loan," this refers to a loan with no discount
points and with a rate about 1/4% higher than a loan with one
origination point.

Back to the Questions

How is the interest rate determined?

Home loans are bought and sold daily by large privately owned
multinational corporations such as Prudential Insurance Company,
semipublic entities such as the California Public Employees Retirement
System (CalPERS), as well as by quasi-governmental organizations such as
the Federal National Mortgage Association (known as Fannie Mae) and the
Federal Home Loan Mortgage Corporation (known as Freddie Mac). These
groups set a price they will pay for loans every day, prices that can be
locked in for a prescribed number of calendar days out into the future.
These are called "forward commitments," and generally translate into
rates which can be offered to individual borrowers for "locking-in" a
rate for their home loan. Since billions of dollars in home loans are
bought and sold every day, the rate/point combinations offered by most
lenders are remarkably similar. The biggest difference occurs when one
lender or another needs to charge more to cover a higher overhead
expense. Factors which negatively affect interest rate are past credit
problems of the borrower, inability or unwillingness to prove income or
assets, low equity positions, and unique property situations.

Back to the Questions

How is my monthly payment determined?

Your monthly loan payment is usually determined by using an
"amortization" table. To amortize means to gradually pay off, and all
loans must eventually be repaid. Using the loan amount, the interest
rate, and the term of the loan, one can determine the minimum monthly
payment needed to pay of a loan by the end of the term, and this what
lenders do when they calculate your minimum monthly payment. Sometimes
lenders require that you pay the monthly amount for property insurance
and property taxes along with your loan payment. This is called
"impounding" your taxes and insurance so that you won't have to come up
with a large lump sum periodically during the year, potentially causing
a strain on your budget. Even if the lender doesn't require that monthly
tax/insurance payments be included with your loan payment, you can
request that this be done. Check the mortgage calculator.

Back to the Questions

When should I apply for a loan?

Before you start looking for a home to buy. It is an essential
piece of information as part of the home-search process to determine
your affordable price range using today's interest rates.

Back to the Questions