In terms of your bad credit home loan, there are two basic types of points you’ll be concerned with. There are points charged for loan origination and discount points, and then there are the interest points you will pay over the life of your loan. In either case, points are equal to 1 percent of your total mortgage amount. Depending on your credit, you will be charged a higher or lower interest rate and fees.
A borrower taking out a bad credit home loan should expect to pay between 2 and even 5 times the amount borrowers with great credit are charged. This can equate to thousands and thousands of dollars, so it is very important you shop around for the very best bad credit home loan you can find. If you’d like to save on the interest points you’ll be charged, look for a bad credit home loan that allows you to buy down points with cash.
If you can afford to do it, buying down points on a bad credit home loan can be a great way to save on interest, and it could significantly lower the amount you pay on your loan each month, too. Essentially, you “buy” point discounts. For each point you pay upfront, your mortgage interest rate should drop by about one quarter of a percent. Most lenders set a limit on how many points you can reduce through pre-payment.
If you don’t plan to stay in your home very long, buying point discounts probably won’t pay off. It usually takes between three and five years to break even on the costs associated with buying down points.