By Alena KairysOct 22, 2020
Nowadays you can earn and redeem points to save money with various services, like at your favorite coffee place or department store. Similarly, you can use points to save when buying a home. Read on to learn how mortgage points can help you get a lower interest rate on your loan.
What are mortgage points?
A mortgage point (also called a discount point) is an additional, optional fee you pay to your lender at closing to obtain a lower interest rate and monthly payment. In exchange for prepaying some of your interest upfront, your rate is reduced for the life of the loan. Depending how long you plan to live in your home, this can save you a considerable amount of money.
Generally speaking, one mortgage point is equal to 1% of your mortgage. It’s common for one point to reduce the original rate by about 0.25%, and you can typically use up to three points during your transaction. For example, if your 30-year fixed mortgage were $150,000 and had an initial interest rate of 3%, one mortgage point would cost $1,500 and lower the rate to 2.75%. Your monthly payment would decrease from $632 to $612. Note that the actual savings you can receive from discount points depends on the loan program, the length of the mortgage term, your lender, and the current interest rates. Another benefit of using discount points is that they can be tax deductible if you itemize. Be sure to discuss with an accountant if you meet the criteria for this deduction.
Should you pay mortgage points?
Using mortgage points can be beneficial if you can afford it and if you plan to live in your home for a long time. Some people can’t afford another cost during the buying process or would rather use the money for future expenses. Homeowners who are considering using points must also determine what the break-even point is, or how long they need to stay in the house for the points to pay off. You can do this by dividing the cost of the discount points by the amount you would save on your monthly payment to give you the number of months it takes to recoup the points. In the previous example, you would be saving $20 per month from using one mortgage point. $1,500 point ÷ $20 savings = 75 months, or six years and three months.
You should speak with your lender to see if using discount points is right for you. If you decide you’d rather not pay any points but still want to score a lower interest rate, you may want to consider refinancing after you’ve owned your home for a few years.
If you have any questions about using mortgage points, contact one of our licensed Mortgage Loan Originators. If you are ready to begin the home buying process, click here to get started!
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