Mortgage Points: How They Work & Are They Worth It?
Closing costs may not be your first consideration when thinking about purchasing a home. But when it significantly decreases your monthly payments, it can save thousands on the loan total.
The basic idea behind is you pay for “points” that reduce your interest rate from the get-go. Buying mortgage points drops the monthly payment and puts more money back into your account.
However, you may be confused without seeing examples or understanding exactly how it saves you money.
Whether you’re already working with a lender or you’re researching before you jump in, we want to explain what mortgage points are and how they work.
This will provide keen insight as to whether they are wise to invest in and whether you should pursue them or not.
What are mortgage points?
Most people think about lowering their monthly payments when purchasing points on their current or future home loan. We think you should know that there are actually 2 different types that occur at closing.
Investing in the correct type will ultimately save you on the loan and put more money back into your pocket for future renovations and building.
These mortgage points are mandatory fees you’ll pay to the lender in order to process the home loan. They accomplish this by originating and reviewing it and charge 1% of the loan per point.
This means the private lender or mortgage company will charge $4,500 on a $300,000 with 1.5 origination points. You’ll have to factor this into closing costs that you must have ready in advance or roll into the real estate contract.
The money-making method known as mortgage discount points is what we are primarily focusing on. Essentially, you’re paying for a cheaper interest rate, which reduces the total loan amount.
While the home buying market is raging with higher rates, it may be wise to purchase these points.
You’ll also pay for discount points at closing by putting the money down and requesting a certain number of points. Similar to origination points, a discount point costs 1% of the loan amount but will lower your interest rate by .25% per point.
This could mean big savings for the life of the loan if you have the cash on hand for the loan officer to drop your mortgage interest.
They are also a form of prepaid interest that is tax deductible, meaning you can include it along with other write-offs for the Schedule A form.
How Mortgage Points Works: Saving on Monthly Payments
Let’s imagine that you’re seeing a 4% interest rate in today’s market for that $200,000 home on a 30-year fixed rate mortgage loan.
That figures to a $954 monthly payment, which may be too high if you’re a young couple or are looking for a cheaper retirement home.
In that case, we recommend purchasing 2 discount points that drop your interest rate to 3.5%. That means an experienced lender will let you know in advance that you’ll need $4,000 in additional closing costs and to prepare for that.
How Much Will I Save Using Mortgage Points?
You will save literally thousands in the upcoming months, although it may not seem that way at first.
Changing your monthly payment to $898 (due to the interest rate adjustment), you’ll save over $20,000 over the loan life. This result comes from our previous calculations and your 2 discount point.
Save even more money by buying more discount points. Although closing costs may be higher, it could be in your best interest to purchase more and store extra cash before purchasing a home.
|2 ($4,000 upfront)
|Savings over Loan
Mortgage Points FAQ
How long will it take me to at least break even on discount points?
Every home buyer’s midpoint between their normal interest and discount point varies. You’ll need to consider the loan amount, interest rate, and life of the loan.
We recommend asking your lender to please review the loan offer. They can calculate the break-even point and the amount you’ll save at various points during the loan.
Is it better to do a home loan refinance rather than purchase discount points?
It makes sense staying in the home for lower interest rates if the refinance is promising. But discount points could tremendously benefit you now if you already have a cheap mortgage rate.
That way, you won’t have to spend home equity doing the refinance. All it takes is working with an experienced lender to help you lock a mortgage rate in sync with the market.
See How Much You Can Save with an Experienced Lender
Saving money on your first or fiftieth home becomes a huge deal once you plan to stay and you’re making payments. While the internet has tips on different lending products and services, we believe discount points are a great place to start.
You’ll be paying for PMI (private mortgage insurance), city/state taxes, and other expenses after buying a home. That means you’ll need to save as much as possible, especially if you want to get comfortable in the home of your dreams.
We offer personalized service of the homebuying journey, including our team advising you on the best strategy for discount points. You can trust our hard-hard working team to find the best finances that fits your needs and timeline.
Give us a call today at (480)-800-8387 to our Phoenix office. Our lending professionals would be happy to answer your questions and assist you with a loan application.