May 18th, 2018 5:31 AM by Jackie A. Graves, President
point is essentially prepaid interest: You pay an upfront fee to lower the
interest rate on your mortgage.
When you take out a
mortgage loan, you run into a lot of closing costs, and few are optional. Most
lenders, however, will give you the option to buy mortgage discount points,
which can lower your interest rate. You may also get the chance to receive a
negative point credit, though this will raise your interest rate.
the lowdown on what mortgage points are, how they work and when you should
and shouldn’t use them.
point can be either positive or negative, though positive points are much more
common. Buying a positive, or discount, point or receiving a negative point
changes your mortgage interest rate. Each kind of
point costs 1% of your mortgage loan amount. For example, if you have a
$100,000 mortgage, you’d pay $1,000 for one discount point.
discount point is essentially prepaid interest: You pay an upfront fee to
lower the interest rate on your mortgage. Because purchasing points lowers
your interest rate, buying them is often known as “buying down the rate.”
Discount points may be tax-deductible if the purchase is for your
primary residence. Before buying points, you should have your lender give you
an estimate for both scenarios — your mortgage closing costs if you buy points
and if you don’t — says Ann Thompson, a divisional sales executive at Bank of
America. She recommends then taking these two estimates to your tax
professional to learn if points are tax-deductible for you and how each option
would affect your overall tax situation.
points, sometimes called rebate points, are different: The lender offers to
give you a credit by paying some of your fees in exchange for a higher interest
sometimes called a no-cost mortgage. Negative points can be paid either to a
broker as part of his or her compensation or to the borrower to cover closing
costs. When a lender offers you negative points, it is effectively saying
it’ll cover some of your mortgage fees and charge you a higher interest
rate in return.
from negative points cannot exceed the mortgage closing costs, and these points
can’t be used as part of a down payment. Thompson says points can be used to
cover some nonrecurring closing costs, such as bank and title fees, but they
can’t cover recurring fees like interest or property tax.
Why would you
willingly take a higher interest rate? If you’re short on money needed for
closing costs, “you may want to pay a little bit more in interest over the life
of the loan to have some of that covered,” Thompson says. Another reason might
be if you want to hang onto some cash for improvements before you move in
and can afford a higher monthly payment.
set amount for how much a point will lower or increase your rate, Thompson says.
It varies by the type of loan, the lender and prevailing rates, since mortgage
rates fluctuate daily.
On the day of
the interview with Thompson, buying a point on a fixed-rate loan lowered the
rate by a quarter of a percentage point. On an adjustable-rate mortgage, the
rate would drop three-eighths of a percentage point.
At Guaranteed Rate,
a national lender, the savings are similar: Buying one point will typically
lower your rate a quarter, or perhaps three-eighths, of a percentage point,
says Dan Gjeldum, senior vice president of mortgage lending.
should pay points?
whether to buy mortgage discount points is always a case-by-case decision,
though it typically comes down to two factors: time and money. How long will
you stay in the house, and how much can you afford to pay to close your
The key factor is how long you think you’ll stay in the home.
Then you can calculate at what point you’ll break even on the cost of the
points (use our calculator
here for a personalized recommendation on whether to buy
personally ever encourage paying points simply because of the fact that it does
take so long to make it up, especially for a first-time home buyer,” Gjeldum
says. While it can make financial sense for some, first-time home buyers
generally don’t hold the mortgage long enough to make up the upfront expense,
can make financial sense for some people to buy discount points, first-time
home buyers generally don’t hold the mortgage long enough to make up the
money may be better spent on improvements like paint, landscaping or new
carpets, he adds.
It may make
sense to buy points when you’re purchasing a long-term investment property or a
home you plan to hold for many years, Thompson says, since you’ll reap savings after
example from Thompson to help demonstrate how long it can take to benefit from
buying a point. Say you’re taking out a $400,000 loan. Since one point equals
1% of the loan, buying one discount point would cost you $4,000. So first, decide whether you
can afford to pay that $4,000 on top of your existing closing costs.
mortgage rates the day she was interviewed, Thompson said buying a point would
save you roughly $57 a month on your mortgage bill. By dividing the cost of the
point ($4,000) by the monthly cost ($57), you determine how many months it
would take you to make up the cost of buying the point. In this example, it’s
about 70 months, or almost six years.
That means if
you planned to stay in the home for six years, you’d break even, and any longer
than that, you’d save money. But if you moved out before then, you’d have lost
buying points makes sense if the seller is willing to pay for it. Gjeldum and
Thompson both say that if an employer is relocating you for work and offering
to pay points to buy down your interest rate, it could also be worthwhile since
you’re not the one shelling out money.
The total closing costs you’ll
pay can vary greatly according to your home’s purchase price.
The average homebuyer will pay between about 2% and 5% of the loan
amount in closing fees.
Your lender is required to outline your closing costs in the Loan Estimate and
this Closing Disclosure you
receive before the big settlement day. Take the time to review them
closely and ask questions about things you don’t understand.
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