Home buying and mortgages go hand in hand.
Over 65% of American homeowners currently have a mortgage. And almost all of these homeowners are searching for a better deal. Lucky for you, we are here to tell you about a great one: mortgage points!
Here is everything you need to know about this money-saving concept.
What are mortgage points?
Mortgage points, sometimes called discount points, are a great way to pay less on your mortgage over the life of the loan.
Mortgage points are fees that homeowners pay directly to their mortgage lender. Homeowners pay these fees on closing day in order to receive a reduced interest rate on their mortgage.
You might also hear people call these mortgage points “buying down the rate.” The lower interest rate can save you significant amounts of money over the life of your home loan term.
One thing to keep in mind about mortgage points: The longer you plan to own the home you are buying, the more using the points will help you. The longer you live somewhere, the more the points will be able to save you in interest fees.
Origination Points vs. Discount Points
There are two types of mortgage points that you need to know about: discount points and origination points.
Discount points are just another name for mortgage points. They are prepaid interest on a loan and are totally tax deductible.
However, origination points are a completely different beast.
Origination points cover the costs that the person taking out the mortgage loan (you!) has to pay to their lender for giving them the loan. These points are only tax deductible if you apply them to the mortgage and not to any of the closing costs.
An important note from the IRS: If the fee is for items that appear on a settlement statement like inspection or notary fees, then you cannot deduct the cost from your taxes.
Is it good to buy points?
How is it possible to receive so many interest points? Well, usually homebuyers pay for them!
Is that a good idea? The answer is sometimes. Whether or not it is worth it for you really depends on multiple factors.
Want to use mortgage points to finance your new home? Here are a few things to think about:
One mortgage point costs 1% of your mortgage amount. Another way to think about it is you will pay an extra $1,000 up front for every $100,000 of your loan.
Think of it this way: You pay some interest up front in exchange for a lower interest rate over the life of your loan. It takes doing a bit of math to determine if using mortgage discount points is a good plan for you.
Are mortgage points for me?
The first thing you need to do is determine if you have the money available up front to pay for the point. The cost of mortgage points is in addition to any closing costs and the down payment on your home.
You also need to consider how long you want to live in the home. You’ll only be able to reach the “break-even point” (the point that makes buying mortgage points worth it) if you stay in the home long term.
Mortgage Points Example
Let’s say the final sales price of your new home is $250,000. You pay the typical down payment of 20% ($50,000).
So, on closing day, you need to finalize the financing for the remaining $200,000 for your home.
Here’s how using mortgage points might play out for you:
| ||No Mortgage Points ||1 Mortgage Point ||2 Mortgage Points |
|Cost of Points (1% of total loan amount) ||$0.00 ||$2,000 ||$4,000 |
|APR ||4.5% ||4.25% ||4% |
|Monthly Mortgage Payment ||$1,013.37 ||$983.88 ||$954.83 |
|How much do you save each month? ||$0.00 ||$29.49 ||$58.54 |
|How long to recover costs? ||n/a ||68 months (roughly 5.5 years) ||68 months (roughly 5.5 years) |
|Total Savings on 30-Year Mortgage ||n/a ||$10,616.40 ||$21,074.40 |
How to Interpret the Chart
You have to live in a home for nearly six years to make purchasing the mortgage points on the onset anywhere close to worth it. After those first six years, you actually begin saving money.
As you can also see from the example in the table, the amount that the points would cost at the beginning ($4,000) saves you well over five times that amount over the course of your 30-year fixed rate mortgage.
You can sort of think of mortgage points as prepaid interest.
The best thing to determine if using mortgage points is a good plan for you is to work with financial advisors to create a table similar to the one above. However, it should have your personal information inserted into it instead. Then you can decide if a higher interest rate is in your best interest.
You’ll also be able to see if you should use a mortgage calculator to decide if your monthly mortgage payments would actually save you money with the inclusion of these discount points.
‧ ‧ ‧ ‧ ‧
Need a Realtor who understands Mortgage Points? You’re in luck! The team at Clever are pros and ready to help you find the best house possible. Call us today at 1-833-2-CLEVER or fill out our online form to start.