What Are Mortgage Points and How Do They Work?
Hi there! I hope you’re doing well this Monday afternoon. Based on a recent conversation, today we’re going to touch on mortgage points. So, I was engaged in a conversation at Starbucks yesterday with a possible client that is thinking of buying his first home. He had a lot of questions, of which I was happy to answer. One such question was, what are mortgage points? I told him that mortgage points is essentially a way to lower his interest rate by paying a one time fee at the closing. Here are some additional information I shared with him.
During the mortgage process, you may hear words like discount points or prepaid interest points. These are just another way of saying mortgage points. Essentially, they all mean the same thing.
One discount point will cost you 1% of your loan amount. However, you can purchase as little as 0.5 points.
If your mortgage amount is $400,000, the cost of one mortgage point would be $4,000.
If you choose to purchase only 0.5% point, your cost will be $2,000.
If you purchase one point, you can expect an interest rate reduction of 0.25%.
Mortgage points are not the same as origination points. Origination point is the fee lenders charge to create, process and underwrite your mortgage loan.
The more points you buy, the lower your interest rate will be. Just keep in mind, the more points you buy, the more it will cost you.
Discount does vary by lenders.
Mortgage lenders do cap the number of points you can buy.
Buying mortgage points is one way you can lower your monthly mortgage payments.
You can pay for your points at closing or you can add the cost into your loan.
To reduce your interest rate by 1% you will need to purchase 4 mortgage points.
Since points are considered prepaid mortgage interest, you may be able to deduct the cost of your mortgage points from your taxes, since mortgage interest is tax-deductible. For more information on this, please speak with your tax advisor, you may also visit IRS home mortgage points rules.
If you plan on paying off your mortgage early, know that you may not benefit much from buying mortgage points.
The longer you plan on staying in your new home, the more you will benefit from buying points.
If you plan to refinance in the near future, you may want to reconsider spending that money on buying points.
Please keep in mind that if you choose to purchase mortgage points, you will lower your APR however, you will also be increasing your closing cost amount.
Working with the right lender will help you to make the right decision when deciding if you should buy points or not. Make sure to choose one that will look out for your best interest.
These are some of the pros and cons of mortgage points that I pointed. In addition, I told him that mortgage points are not for everyone. Some will benefit and some will not. Like him, if you have questions and or concerns about mortgage points, I do hope this information was helpful.
Before you make the decision to invest in mortgage points, you too, may want to first determine how long you plan on staying in the home, and how much you will save on your mortgage payments every month if you decide to buy point/s. In addition, I cannot stress this enough, speak with a loan officer that will look out for your best interest and not theirs. You do not want to work with someone that burden you with a mortgage product that benefits them and not you. As always, we thank you for visiting today. Until next time…Diana
