1 Mortgage Trap That May End Up Draining Your Wallet

Credit: Getty Images

No doubt there are a number of pitfalls to be aware of when getting a mortgage. From teaser rates that don't represent your true costs to complex fee structures, it's clear that homeowners need to have the right information in hand to secure mortgage savings.

Case in point: Buying discount points.

Motley Fool analysts, Kristine Hartjes and Nathan Hamilton, discuss that topic in the video below, highlighting both when buying discount points will improve your bottom line and when doing so could hit your wallet.

5 Simple Tips to Skyrocket Your Credit Score Over 800!Increasing your credit score above 800 will put you in rare company. So rare that only 1 in 9 Americans can claim they're members of this elite club. But contrary to popular belief, racking up a high credit score is a lot easier than you may have imagined following 5 simple, disciplined strategies. You'll find a full rundown of each inside our FREE credit score guide. It's time to put your financial future first and secure a lifetime of savings by increasing your credit score. Simply click hereto claim a copy 5 Simple Tips to Skyrocket Your Credit Score over 800.

KRISTINE HARJES:

There are so many details that go into getting a mortgage, and some of the finer points are really important to consider lest they end up costing you a ton of money. Here's an important one discount points. What are they?

NATHAN HAMILTON:

Essentially it's a fee that you're paying at the beginning of your mortgage origination to reduce the interest rate on your loan. If you're living in your house for a longer period, it's going to make sense to do that, but if it is somewhat of a short-term mortgage, then it may not make sense to buy discount points.

KRISTINE HARJES:

So in a sense, you're paying up front to try to save yourself money over the long term, but it only makes sense if you are actually going to be paying for the long term.

NATHAN HAMILTON:

Yes. And if you look at it, on average American homeowners spend about nine years in their house before moving on to another location. And in general (this is a very rough rule of thumb), if you spend on average about five years, it's what it will take to break even on buying discount points. On the whole, [for] most people it makes sense to buy discount points. They're living in their house for nine years and typically break even after five.

But there are other scenarios, [and] it's dependent on each mortgage. As your rate varies, as the amount of your mortgage varies, that five-year rule may not hold steady, but it is a very rough benchmark that people can look at to determine [if it] makes sense to buy discount points. Is it going to save [them] money?

KRISTINE HARJES:

And how much, in general, will these points save you?

NATHAN HAMILTON:

As you look at buying a point, you get about a 1/4 to 3/8 of a point discount, and it's about 1% of your mortgage.

KRISTINE HARJES:

OK. And does that payment reduce your down payment?

NATHAN HAMILTON:

It does not reduce the down payment.

KRISTINE HARJES:

Very interesting.

NATHAN HAMILTON:

Yeah. It is an up-front cost which is something to account for, because if you are buying discount points and putting a down payment down, it highlights the point that [you] need to have more money at origination to be able to cover the cost of this mortgage.

KRISTINE HARJES:

And that's why it's important to have all this information going into the process. If you're looking for more information and all of the details about getting a mortgage, you can check out Fool.com/Mortgages where you can compare rates and get in contact with certified lenders, or even download our free mortgage guide, "5 Tips To Increase Your Credit Score Over 800."

[End]

The Motley Fool has a disclosure policy.