Blog

What Are Mortgage Points?

What Are Mortgage Points?

February 6th, 2019 | Interest Rates, Conventional Loans, Fixed Rate Mortgages

If you have ever checked out the current status of mortgage interest rates, you may have seen the average points listed next to the rates. What are these points and how do they affect your interest rate?

Points Defined

Mortgage points, or discount points, are upfront fees paid to your lender that allow you to “buy down” your interest rate on your home loan. The idea is that you are prepaying some of the interest on the mortgage, which gives you a lower rate. The more points you pay, the lower your interest rate will be. One point is equal to 1% of the total mortgage loan amount. For example, one point on a $100,000 loan would be $1,000. While the rate varies from lender to lender, each point paid can buy down your rate by about 0.25%.

Break Even Point

Before buying any points, it is important to figure out your “break-even point” – how long it will take for your monthly savings to equal your upfront payment. For0 example, if you pay $4000 in points at the beginning of your loan in order to save $60 a month on your payments, it would take roughly 67 months to break even. That means you would need to stay in your home for at least five-and-a-half years in order to realize any savings from paying that amount of points.

When Should I Pay Points?

Paying for points makes the most sense when you plan to stay in your home for a long time. That allows the upfront cost to be outweighed by the monthly savings eventually. If you intend to buy a home and only stay for a few years, points are not usually worth the price. Any monthly savings would not be realized after factoring in the initial points investment.

In some cases, buying mortgage points could give you a tax benefit. As long as your home purchase meets certain requirements, your points are tax deductible. If this is helpful to your overall financial situation, paying points might be a good choice for you.

If you are trying to decide between making a full 20% down payment or paying some points for a lower interest rate, you should realize that without a full down payment you will be required to carry private mortgage insurance (PMI) which could negate any interest rate savings for several years. Be sure to carefully calculate the costs of each choice.

For those taking out adjustable rate mortgages (ARMs), it is important to know that points usually only provide a discounted rate during the initial fixed-rate period (typically 5 years.) You should pay points on an ARM loan, only when your break-even point will fall significantly before the fixed-rate period ends. 

Paying points may also be a good idea if a family member is gifting you money for your home purchase. In this case, you will have more money at the time of purchase than you will in the future and it may be better to use that money to buy down the rate, making it easier for you to afford the payments on your own.

In certain situations, paying mortgage points can save you money in the long run. Talk to your mortgage lender about the current exchange rate on points and whether paying points is a smart idea for your loan.

Comments



Leave a Comment

Contact Us


Not readable? Change text.


docs

Required Documents

VA Loans

Veteran Loans

Disclaimer:
Prime 1 Bancorp, Ltd is not affiliated with any government organization or bank nor do we act on behalf of the FHA or VA. This material is not from HUD or FHA and has not been approved by HUD or a government agency. We are not a Federally chartered or State Chartered Bank. We are an we are an Illinois Residential Mortgage Licensee by the Office of Banks and Real Estate License #MB.6761138, a Colorado Registered Mortgage Brokerage by Division of Real Estate, a Florida Residential Mortgage Brokerage Licensed by the Office of Financial Regulation License #MBR1930 dba Prime 1 Mortgage Inc, a California CFL Licensed Mortgage Brokerage by Department of Business Oversights 60DB055973 and a Texas SML Licensed Mortgage Brokerage by the Texas Department of Savings and Mortgage Lending. Prime 1 Bancorp, LTD Corporate Office is located at 2720 S. River Rd Suite 50, Des Plaines, IL 60018 our Toll Free Number is 888-205-3737. NMLS: 1434638

Loan product availability is subject to qualification of the borrower and loan approval after full review of the file. Not every applicant qualifies or is eligible for every loan program. Some loan products may not be available in all states. Loan approval, note rate and annual percentage rate are dependent on factors including, but not limited to, credit, collateral, income, assets and overall financial history. Not all applicants will be approved for a loan. All loan programs, terms and annual interest rates are subject to change without notice. NMLS: 1434638