Mortgage Points: A Complete Guide

mortgage points

How Do Mortgage Points Work?

Mortgage points are something you come across in your journey as a homeowner. Home mortgage points work specifically by allowing you to get lower interest rates. It’s not always a good approach, but if you’re in the purchase process and don’t want to refinance your mortgage soon, obtaining mortgage points may be a wise option. 

What Are Mortgage Points?

There are primarily two types of home mortgage points.

i) Origination points are a part of different prices you could pay to a mortgage creditor. This type of mortgage point does not affect you besides the cost associated with getting your home loan. Furthermore, understanding the origination factors can help you compare brokers to find one with the lowest rate and negotiate commission charges.

ii) Discount factors are points that you can buy to lower your mortgage interest rate. Discount points are a form of interest; thus, purchasing points when you first secure your loan can lower your regular payments and the total cost of lending. Each discount point typically costs 1% of the credit amount.

Benefits of Home Mortgage Points

The main benefit of purchasing mortgage points is the reduced interest rate on your loan and the amount you will need to repay over the life of the loan. Typically, each point lowers your mortgage rate by 0.25%; however, the exact value may vary. 

Reducing the mortgage interest rate will decrease your monthly repayments, making it easier to cover your other expenses. In addition, the cost of the mortgage points can be an itemizable tax deduction as you are paying the interest rates upfront. If you qualify for the IRS, you can receive a full deduction for the year you spent the mortgage points. Otherwise, you might be able to claim the tax deduction over the life of your loan. 

How to Calculate Mortgage Points

Before purchasing a mortgage point, calculate your break-even point when your savings from obtaining a lower interest rate are equal to the value of the points. 

For example, if you consider a $300,000 mortgage, each point would cost around $3,000. Suppose the home loan has a fixed-rate, 30-year loan term, and an interest rate of 4.5%, and the points you purchase reduce the interest rate to 4.25%. 

As a result of purchasing mortgage points, your monthly payment will drop from $ 1,520 to $ 1,476, with savings of $ 44 every month. Also, divide the $3,000 value by $44—you will find it takes almost 5.7 years (or 68 months) to break even. 

Moreover, buying mortgage points will be inexpensive if you think you can relocate or refinance before 68 months. But if you expect your mortgage payments to exceed the break-even point, a mortgage appraisal can save you money. 

The good news is, that you can browse online and find mortgage points calculators that can do the mathematics for you. The hardest part is deciding how long you need to stay in the house.

Should I Buy Home Mortgage Point?

The mortgage points may not be suitable for all home buyers. Calculating a break-even factor is a good start. However, there’s more to consider before acquiring a mortgage point. For example, you will need to save additional funds to cover the costs of points. 

While a point typically decreases your interest rate value by 0.25%, the commission per point can vary depending on the lending institution, loan type, and market conditions. Additionally, make sure to calculate the numbers that are specific to the type of mortgage you are considering.

Even if you intend to pay for points, you still need to get competitive home loan offers to find the best rates and terms. For example, spending on points from one lender might lower your interest rate, but it might be higher than a competitor’s offer. 

You may find that the cost of each point from the same lending institutions varies when comparing loan types. Also, if you are considering an (ARM) adjustable-rate mortgage loan, it’s worth noticing whether the lender continues to lower the rate after your initial fixed-rate term ends. 

To conclude, the simplest and easiest solution might be to put more money into the larger initial deposit.

Mortgage Points Are Only Work of the Calculations

While getting mortgage points can reduce your interest rates and save money, keep the big picture in mind when planning your purchases. If you have enough time, improving your credit and saving up for a larger down payment can be essential steps to save even more. After that, shop around and find the mortgage that will cost you minimum interest rates. Follow us for more money-saving mortgage tips. 

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