A two point mortgage is a type of loan that allows the borrower to pay two points at closing in order to secure a lower interest rate. A point is a fee that is paid upfront by the borrower to the lender. Each point is equal to one percent of the loan amount. For example, if you take out a loan for $200,000, each point would be worth $2,000.
The two points are normally paid in the form of cash, but they can also be paid with a combination of cash and a higher down payment. The two points are calculated as a percentage of the loan amount and then added to the loan balance. The amount of the two points is usually set by the lender and is usually between 0.25 and 2.0 percent.
Benefits of a Two Point Mortgage
The main benefit of a two point mortgage is that it allows the borrower to secure a lower interest rate. This can potentially save the borrower thousands of dollars in interest payments over the life of the loan. Additionally, it can also reduce the size of the borrower’s monthly payments.
Another benefit of a two point mortgage is that it can provide more flexibility for borrowers who are trying to qualify for a loan. By paying two points upfront, the borrower can lower their debt-to-income ratio and make it easier to qualify for a loan. This can be especially beneficial for borrowers who have high credit card debt or other types of debt.
Risks of a Two Point Mortgage
The main risk of a two point mortgage is that it requires the borrower to pay more money upfront. This can be difficult for some borrowers, especially those who are already stretched thin financially. Additionally, if the borrower doesn’t make their payments on time, the lender may be able to charge late fees or other penalties.
Another risk is that the borrower may not be able to afford the higher payments that come with a two point mortgage. If the borrower is unable to make the payments, they may end up defaulting on the loan and losing their home. This can have long-lasting and serious financial consequences.
Should You Get a Two Point Mortgage?
Whether or not you should get a two point mortgage depends on your individual financial situation and goals. If you can afford the higher payments and you’re looking for a way to secure a lower interest rate, then a two point mortgage may be a good option for you. However, if you’re already financially strained and unable to make the additional payments, then a two point mortgage may not be the best choice.
Conclusion
A two point mortgage can be a great way to secure a lower interest rate, but it’s important to consider all the risks involved. If you’re able to afford the higher payments and you’re looking for a way to save money on interest payments, then a two point mortgage may be a good option for you. However, if you’re already financially strained and unable to make the additional payments, then a two point mortgage may not be the best choice.
