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Are Mortgage Points Right for You?

May 25th, 2019 9:35 AM by Jackie A. Graves

Mortgage points can save you in the long run, if the numbers line up correctly.

The closer you get to closing on your home, the more you will find that a variety of i’s will need dotting and t’s will need crossing before you are finally handed the keys. And, one potentially fantastic incentive to consider taking advantage of during the process comes in the form of deciding to buy mortgage points. If you don’t know what they are, don’t dismay, just read on.

What are mortgage points?

In a nutshell, mortgage points are discounted interest payments to your lender when closing on your home. Also called “discount points” or the “buying down rate,” one mortgage point is worth 1% of your loan’s amount. In dollars and cents, that would equate to paying $1,000 for every $100,000 of the loan.

Your lender typically offers them to you alongside your mortgage quote. If you take advantage of the mortgage points offer, you are paying interest on your loan upfront in order to reduce the rate over its lifetime. When you receive your mortgage quote, your lender will include your loan rate and detail your mortgage points.

But, should you take advantage of this offering?

There are plenty of reasons to pause before pouncing on this. One of the first things to do is ask yourself how long you plan on staying in the home. If it is a shorter-term stay, it might not be optimal to purchase mortgage points, but the longer you intend to stay in the home, the more beneficial deciding to buy mortgage points will become to your bottom line.

While you are doing this initial assessment, it is also key to look honestly at your access to cash and ask yourself: “is there enough to pay for the points, my down payment, closing costs, and reserves?” If the answer is yes, the benefits of buying mortgage points might be just what you need.

There are two types of mortgage points.

Discount points

Discount points are prepaid interest on your mortgage loan. As the homebuyer, you are offered the opportunity to purchase anywhere from zero to four points depending on how much you want to lower your rate. So, for example, for a $300,000 loan, one mortgage point is worth $3,000. After calculating, one mortgage point at a 4% interest rate for a 30-year mortgage brought the savings to over $10,000 for a 10-year period, while four mortgage points saved less than $2,500.

Part of the reason for deciding to buy mortgage points is to pay upfront in order to lower your interest rate over time. Another advantage to this incentive is that it can be tax deductible, so make sure to ask your lender about it.

Origination points

Origination points are charged by the lender and cover the cost of making your loan. Origination points can be tax deductible, but with a few caveats: they are deductible when you use them to obtain your mortgage, but not to pay other associated closing costs. The IRS details what can and cannot be deducted, including notary and inspection fees.

In addition to the length of time you plan on staying in the home, another number to crunch before deciding on whether or not you will buy mortgage points is the “break even period.” This is the length of time it will take for you to recoup the money you paid out for the points.

How to calculate when you’ll break even with mortgage points.

To calculate this, divide the cost of the points by the savings on your monthly payment. The resulting number is the length of time it will take for your monthly payment savings to equal what you paid for the points. In the case of the $300,000 home, savings with one mortgage point are about $73 per month, dividing that by $3,000, we get a total of 41 months, or roughly 3.4 years to “break even.”

It is also important to note that the rate is not set and relies on your lender and the marketplace. Similarly, if you are buying mortgage points for an adjustable rate mortgage (ARM), the deduction is different and often only provides you a discount for a shorter, set amount of time, such as the initial fixed-rate period.

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