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Mortgage points are also referred to as discount points in some cases and what they are is actually a fee paid to your mortgage lender.
These points allow you to pay more upfront (during the closing process) so that you can pay lower interest throughout the mortgage period. It’s going to help you decrease the mortgage payments you have to make every month.
A single point will generally cost 1% of the total mortgage amount, which means $1,000 for every $100,000 of your mortgage. So, you’re paying a bit of the interest upfront so that you don’t have to worry about paying for it later.
If you are going to stay in your house for a long time, and especially if you’re planning to pay off the mortgage before moving out you can save a lot on interest over the life of the mortgage.
The key is to take a closer look at the different numbers associated with your situation and see how it works.
What Are Mortgage Points?
Okay, so the first thing we need to talk about is what mortgage points actually are.
In general, these are payments that you make to your lender during the process of closing on your new house. You pay these points in exchange for getting a lower interest rate later on. So, you’re buying down your rate and you’re helping both yourself and your mortgage lender. They get money upfront and you get to cut the interest that you pay and make smaller payments overall.
You’ll find two different types of points available.
- Discount Points – This is what we’ve just talked about. The more you buy the better it is for your overall payments and you’ll end up with lower interest rates. You get to work with your lender to figure out the rates and benefits that you can get but you may be able to lower your rate by as much as ¼ of a percent.
- Origination Points – This is where your lender charges you for the processing of your loan. It’s going to be another area where you can negotiate with your lender to find out the options.
If you pay discount points you can generally lower your interest by as much as an eighth of a percent per point over a 30-year mortgage. Or, if you get a 15-year mortgage you could lower it by as much as a quarter of a percent, based on a $100,000 loan.
Now, each of the points that you get is going to cost you 1% of the total amount you’re taking out from the lender. If you’re borrowing $200,000 you’ll pay $2,000 a point. If you borrow $300,000 you’ll pay $3,000 a point. Also, these points are due at closing, so you’re going to have a higher payment when you purchase your home. However, they can save you in the long run.
For those who want to lower their rate, this is a great way to do it. If you’re looking to lower your rate from 6% to 5% on a 30 year mortgage for a $100,000 loan you would need to purchase 4 points.
When Should You Buy Mortgage Points?
If you’re planning to stay in your home for an extended period of time it’s a good idea to look at purchasing points. That’s because you’re going to be paying more on the mortgage and you’ll reap more of the benefits of the points.
You’re going to need to make sure you can actually afford the points you’re paying for and also make sure that you don’t overwhelm yourself when you add in all of the other closing costs and such that go along with it. Also, remember that points are actually tax deductible and you are considered to be prepaying interest. So, you’re going to have some additional benefits as well.
On the other side of things, if you’re only planning on staying in that house for 5 years or less it’s likely not a good idea to purchase extra points. After all, you’re not going to pay enough interest for it to be worth the decrease. For most people, 5 years is about how long they wait before moving or refinancing.
For those who don’t have a whole lot of money and are going to be stretching themselves in the process of purchasing a home, it could be too expensive to add on discount points. In some instances, a seller will pay the points, but if they offer to pay points in exchange for a higher sales price this is not something that you want.
You should pay close attention to what you can afford when it comes to points and plan accordingly. Now, if you’re not able to buy points because of costs you can also shop around for a variable rate mortgage that can help you along even more with a lower introductory rate.
What is Your Mortgage Break-Even Point?
When you’re looking at buying points you want to make sure you pay attention to what your actual break-even point is. This is how long it’s going to take for you to get your money back from buying those points.
You want to decide how much you’re paying in points by the amount that you’re saving on your bills by purchasing the points. That’s how many months it takes to break even.
How To Calculate The Break-Even Point?
Okay, let’s break this down a little bit more and say you are borrowing $100,000 for your home with a 30-year mortgage and 4.5% interest.
That means your payment will be around $506 a month.
- One Point – If you purchase one point that gives you a discount of 0.25 percentage points then you’ll end up at 4.25% interest. This means you’re going to pay $492 a month and save $14 every month. Your break-even point is $1,000/$14 which equals 71 months. This means you will need to stay in the house for at least 6 years to break even on how much you spent.
- Two Points – If instead, you choose to purchase two points that give you a discount of 0.50 percentage points then you’ll end up at 4% interest. This means your payment is going to $477 a month, or a savings of $29 on your monthly payment. Your break-even point is $2,000/$29 which equals 69 months. This means you will need to stay in the house for at least 6 years to break even on how much you spent.
- Four Points – If instead, you choose to purchase four points that give you a discount of 1 percentage point then you’ll end up at 3.5% interest. This means your payment is going to $449 a month, or a savings of $57 on your monthly payment. Your break-even point is $4,000/$57 which equals 70 months. This means you will need to stay in the house for at least 6 years to break even on how much you spent.
|Monthly Payment Difference||Break-Even Point|
|1 point||$10 ($501-$491)||71 months (5 years, 11 months)|
|2 point||$29 ($501-$477)||69 months (5 years, 9 months)|
|4 point||$57 ($501-$449)||70 months (5 years, 10 months)|
If you want, you can always also use our mortgage points calculator.
Now, it’s important that you remember that what type of interest savings you get is entirely up to your lender. That means these amounts are only for explanation or example. They’re not an industry requirement or standard.
Also, if you get points on an adjustable-rate mortgage you’re generally only getting the discount during the initial period where the interest is fixed. You want to make sure you’re going to reap the benefits before you lose them.
According to data obtained from Freddie Mac, the interest rate on a 30-year conventional mortgage has been on a gradual decline. In 1975, the rate of the 30-year conventional mortgage was 13.74%, and it has declined to 3.08% in 2021. Mortgage lenders lower mortgage rates as a way of stimulating growth in the housing market.
Negotiate Mortgage Points
Both discount and origination points are theoretically changeable when applying for a loan. In practice, though, this isn't always the case. Once you've been approved for a loan, the only way to know for sure is to chat with your loan officer.
Applying for mortgages from different lenders is one of the best things you can do if you want to successfully negotiate either discount or origination points. When you receive loan offers, you can then let each lender compete for your business by negotiating cheaper interest rates or closing expenses.
Credit bureaus treat credit checks from several mortgage lenders within around a 30-day period as one credit check, so you don't have to worry about it harming your credit score. They presume you're looking for the best deals, which you should be doing.
Buying Mortgage Points May Give You a Tax Benefit
If you do get points you’re generally going to have them amortized, which means they’re paid off gradually rather than all at once. But that doesn’t mean you can’t get some good benefits out of them when it comes time to pay your taxes.
If you used a mortgage to buy your home and it serves as your primary residence you could actually get a reduction in the tax year that you first took the loan out. But you have to make sure that you’re getting the right type of loan. A tax professional can help you figure out if you qualify and also what you need to do about your tax situation in order to get a deduction.
How Many Points Are Allowed?
There’s no set number of mortgage points out there, but each lender is able to set their own rules and limits. Generally, you’re not going to be able to buy more than four points for your mortgage.
Now, the reason for this is that there are specific limits on how much you can pay for closing on a mortgage. If you purchase too many points you could actually end up spending more than you’re allowed to. That means you are going to be limited to what you’re able to purchase.
The average, when it comes to what most people decide to get, is around 0.5 points. Of course, that accounts for people who don’t purchase any extra points, those who purchase as many as they can and everyone in between as well.
Are Mortgage Points Worth It?
For some people, the idea of spending their money on points just doesn’t seem like a good idea. They believe that spending that money on stocks is a better option because it could net a higher return. Still, for many people, the idea of being able to pay off their mortgage even sooner is a better idea. It also makes sure that you’ll be better financially in the future.
You’ll also be looking at somewhere you can live and enjoy your life with your family. Most people aren’t buying a house as an investment. Even though it generally does increase in value, that’s just not what’s important to most people. As a result, it doesn’t matter if you get more money somewhere else.
If your home has enough value you will be able to sell it for a profit over what you paid, but you’re only going to get something similar when you have to purchase a new house. That means you’re not really getting much extra for your investment.
Plus, if you take too long to pay off the mortgage you’re actually not going to see any benefits even if your home value does go up, because you’ve paid so much more than the value.
It can be possible to negotiate mortgage points on your loan. Lenders can add discount points to your offer even if you don’t purchase points. So, it is always well worth asking potential lenders if they can make an offer more attractive.
Negative mortgage points are essentially closing costs rebates that some lenders offer to reduce the upfront financial burden of closing. Negative points are designed to help certain homebuyers gather sufficient cash for closing.
However, the point credit cannot be used for part of the down payment and the total may not exceed the settlement costs. You may be able to use the points to cover some closing costs, but they may not be applied for recurring expenses such as your property tax or interest.
The mortgage interest deduction reduces your taxable income by the amount of mortgage interest you paid throughout the year. Keep track of your mortgage payments if you have one, as the interest you pay on your house loan might help you lower your tax bill.
In general, you can deduct the mortgage interest you paid on your primary or second property for the first $1 million of debt during the tax year. If you bought the house after December 15, 2017, you may be able to deduct the interest on your $750,000 initial mortgage.
You must go beyond the interest rate and consider the overall financial situation. You will be able to grow home equity faster if you pay off your debt within 15 years. However, you may have to pay the price by sacrificing other financial objectives.
Long-term perseverance in saving and investing will provide you more independence. However, you may become tired of taking on debt responsibilities in this instance. Finally, choose the approach that best fits your budget and provides you with piece of mind.
You should seriously consider using an online mortgage application if you are a potential borrower who wants to simplify the approval process by avoiding going to branches to apply for mortgages.
This enables qualified borrowers to get pre-approval for mortgage loans online, making the mortgage process easier. You should be able to apply for pre-approval through the lender's website as long as you match the lender's eligibility criteria.
The prepayment fees charged by the lender in order to process a fresh loan application are known as mortgage origination fees. This charge compensates the lender for the loan's execution.
Furthermore, a loan origination charge is stated as a percentage of the overall loan amount. This percentage normally ranges between 0.5 and 1% of all mortgage loans.
Origination costs are applied to services such as payment financing, processing, and underwriting and are sometimes referred to as “points” or “discount fees,” especially when they are equal to 1% of the borrowed amount.
Make large withdrawals or deposits as little as possible. This may prompt the lender to raise red flags and reject your application. Also, do not change employment during this time. To demonstrate stability and dependability, you want your income stream to remain consistent.
Also, don't use your home equity to build a line of credit, and don't close your credit accounts. Finally, pay no attention to any collections. Your credit score may suffer as a result.