Mortgage Points: Pro vs. Con
Mortgages can be a little tricky! These are a lot of terms and numbers thrown at you all at once from fixed-interest, interest rates, down payments, closing costs and more. Well among those terms is a mortgage points. These points can negatively or positively affect you depending on the loan duration and how much you can comfortably afford at closing.
Let’s walk through a how mortgage points work and when it may or may not be a good idea to pay for them.
Origination points versus discount points
Mortgage points are expressed in two different forms origination points and discount points. Both types are equivalent to onepercent of your mortgage amount. Therefore, if you have a $200,000 loan, $2,000 would be one mortgage point. Lenders may ask for you to pay an origination point at closing to cover the costs of the loan. Although, not all lenders charge origination points, and you should see if you can negotiate removing these fees as a contingency of the sale. And Every penny counts when closing a house!
The second type of mortgage loan is the widely popular discount point. This is essentially a prepaid interest, where you pay a certain dollar amount at closing and the lender is able to work that into your mortgage APR. You mortgage may have zero, one, or even several discount points. In exchange for paying points, your interest rate is lowered. On average one purchased discount point saves a quarter of a percent on your interest rate. Discount points paid on primary residences are tax deductibles, although origination points are usually only deductible for rental properties.
When should I pay for discount points?
In general discount points are most beneficial for those planning to stay in their homes for a long time. If you are planning on moving after a few years, discount points may not be work the investment for you.
Let’s say you get a 30-year fixed-rate mortgage for $150,000 with a 4.75% interest rate. Your monthly payment would be $782.47, and would end up paying $281,689.56 over the lifetime of the loan. Now, take that same loan and apply two discount points. That would be $3,000. In exchange your interest rate is lowered by a half-percent. Now your monthly payment would be $737.91, and you would only spend $265,647.54 over the period of 30 years.
If you are planning on staying in your home, then an additional saving of $16,000 is amazing! Although, if you plan on moving after a few years this may not be worth the $3,000 investment at closing since you will not reap the benefits for several years into your loan.
Also, affordability plays a huge factor in whether or not you can pay points at closing. If you’re struggling to pay the down payment, this option may not be best suited for you. Lenders may offer to tie in the down payment amounts with your mortgage, although keep in mind this will just increase the amount you owe, and therefore your monthly payments will only get larger.
Take time to do the math. Reach out to the YHN Mortgage Teamto see how much the points would lower your interest rate. What does that mean to in regards to how much you will be saving over the life of your loan? Weigh these costs against how long you plan on residing in your home and how much you can comfortably afford to put down at closing to figure out whether paying points are right for you.