Mortgage Points: Are They Right for You?
The homebuying process can be daunting and confusing. Knowing all the options available to you can lessen some of the confusion. One option to consider is mortgage points. Mortgage points, sometimes referred to as “discount points” or “mortgage discount points,” are a way to help lower the interest rate on your mortgage.
What Are Mortgage Points?
There are two types of mortgage points to choose from: discount points and origination points. While there are differences, both options usually equal 1% of the total mortgage amount. For example, one point on a $250,000 mortgage would cost $2,500.
Discount Points
- Reduce the interest rate on the mortgage, lowering monthly mortgage payments.
- While the amount can vary, each discount mortgage point lowers your monthly interest rate by 0.25%.
- May be tax deductible within certain limits. Ask your loan officer for more specifics.
Origination Points
- Cover the lender’s cost for processing the mortgage loan. They can be part of your closing cost fees.
- Unlike discount points, origination points do not affect your mortgage rate.
- Origination points are not tax deductible.
Are Mortgage Discount Points for You?
The easiest way to determine if buying discount points is a cost-saving option for you is to consider your breakeven point. Your breakeven point is the time it takes for the savings from the reduced interest rate to exceed the initial cost of the discount points. Here’s a quick example: If buying one point at $2,500 on a $250,000 mortgage lowers your payment by $50 a month, it would take 50 months to reach your breakeven point.
If you plan to stay in your home beyond your breakeven calculation, purchasing discount points can be a cost-saving decision.
Ultimately, it is up to you to decide if the upfront expense is worth the long-term savings associated with mortgage discount points. Contact our loan officers today to learn more about a solution that best meets your needs.