Lenders will often provide quotes that include loan rates and mortgage points. But what exactly are mortgage points? A point is a fee equal to 1 percent of the loan amount. A 30-year, $100,000 mortgage might have a rate of 7 percent but come with a charge of 1 point, or $1,000.
There are two types of points:
- Discount Points: These points are prepaid interest on the loan. The more points purchased, the lower your interest rate will be. These points are tax-deductible.
- Origination Points: This is charged by the lender to cover the cost of making the loan. It is only tax-deductible if it was used to obtain the mortgage. It is not tax-deductible if it was used to pay other closing costs such as notary fees, preparation costs and inspection fees.
Deciding whether to pay for points, or not, depends on a few factors. One is how much money you have to put toward your down payment. The other is how long you plan on staying in your home. Bankrate.com breaks it down like this: A lender might offer you a 30-year fixed mortgage of $165,000 at 6 percent interest with no points. The monthly mortgage principal and interest payment would be $989. If you pay 2 points at closing (that’s $3,300) you can bring the interest rate down to 5.5 percent, with a monthly payment of $937. The savings difference would be $52 per month. But it would take 64 months to earn back the $3,300 spent upfront via lower payments. If you’re sure you will own the house for more than 5 1/2 years, you save money by paying the points.
This chart outlining mortgage points is a quick and easy way to help determine the amount of money a point is worth:
Always compare the cost of the loan with and without mortgage points and keep in mind that they can be paid out-of-pocket or applied to the interest rate of the loan. It’s also important to note that not every bank charges mortgage points, so shop around and ask questions. It is possible to secure the lowest loan amount possible while avoiding mortgage points entirely. You can also use NewTowne Mortgage’s mortgage calculator to determine how much points will affect your mortgage.
Sources: Thinkstock, bankrate.com, thetruthaboutmortgage.com
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