Mortgage Points: What Are They and Should You Buy Them?
Navigating the complexities of mortgages often involves encountering terms like “mortgage points,” which can initially seem daunting. However, understanding the fundamentals of mortgage points is crucial, as it could potentially save you thousands of dollars over the life of your loan. Here’s a comprehensive look into mortgage points, how they function, and whether purchasing them is beneficial for you.
What Are Mortgage Points?
There are two different types of mortgage points: discount points and origination points. Both options are usually equal to 1% of the total mortgage amount. For example, on a $200,000 home, one point would cost $2,000.
Discount points are prepaid interest fees paid at closing to reduce the interest rate and consequently lower monthly mortgage payments. Although the amount of discount points purchased varies, typically, each point lowers the interest rate by about 0.25%.These points can range from fractions of a point up to three points. Importantly, discount points may be tax deductible within certain limits.
Origination points, on the other hand, cover costs associated with evaluating, processing, and approving the mortgage. Unlike discount points, origination points are not tax deductible. While not all lenders require origination points, those that do may be open to negotiating these fees or offering alternative fee structures like flat fees or no-fee mortgages.
Calculating Mortgage Discount Points
If you’re considering discount points, you may want to consider:
- Upfront Cost: Determine the cost of the points, usually expressed as a percentage of the loan amount.
- Monthly Payment Difference: Understand how much each point reduces your monthly mortgage payment (typically by 0.25% for each point).
- Break-Even Point: Calculate how long it will take to recoup the upfront cost of purchasing points through the savings on your monthly payments. For example, if buying one point on a $300,000 loan reduces your monthly payment by $50 and costs $3,000 up front, your break-even point would be 60 months (five years).
Should You Buy Discount Points?
Buying points may be helpful for:
- Cash Flow Management: If you have extra cash after making your down payment, buying points can reduce your monthly mortgage expenses.
- Long-Term Savings: If you plan to stay in your home beyond the break-even point, buying points can save you money over the life of the loan.
- Lower Monthly Payments: Points can reduce your monthly mortgage payment, providing ongoing financial flexibility.
Buying points may not be worth it for:
- Short-Term Ownership Plans: If you anticipate selling the home or refinancing before reaching the break-even point, buying points may not be worthwhile.
- Immediate Cash Needs: If you need the cash you would use for points for other immediate expenses, buying points might not be feasible.
- Insignificant Savings: If the monthly savings from buying points are minimal, it may not justify the upfront cost, even if you eventually reach the break-even point.
Ultimately, the decision to purchase mortgage points depends on your specific financial situation, long-term housing plans, and cash flow needs. Consulting with a Union Savings Bank mortgage advisor can provide personalized insights into whether buying points aligns with your homeownership goals.
Reach out to a USB loan officer today for help understanding the break-even analysis and tailor solutions to your needs.
By understanding the nuances of mortgage points, you can make informed decisions that best suit your financial goals and homeownership aspirations.
All home-lending products are subject to credit and property approval. Rates and program terms and conditions are subject to change without notice. Other restrictions and limitations apply.
These articles are for educational purposes only and provide general mortgage information. Products, services, processes, and lending criteria described in these articles may differ from those available through Union Savings Bank. For more information on available products and services and to discuss your options, please contact a Union Savings Bank loan officer.
