If you have gotten a mortgage or shopping for one you have probably heard the term “points”.
What are points on a mortgage?
What Mortgage Points Are
A mortgage point is a fee charged by a lender, there are two types of points. Discount points and origination points. A mortgage point is equal to 1% of the loan amount. For instance if you have a $300,000 loan, a point is $3,000, or 1%.
Origination points are a fee charged by the lender to compensate the loan officer. However, not all lenders will charge points. Some times mortgage points are referred to as an origination fee, but they are the same thing. On average most lenders charge approximately 1 origination point. These mortgage points are not tax deductible.
Discount points are pre-paid interest on a loan. For each discount point you the mortgage rate will be reduced by up to a quarter of a percent. The amount of rate reduction per discount point varies between lenders and market conditions. Because you are paying less interest, your monthly mortgage payments will be lower as well. Most lenders will allow you the opportunity to buy up to 4 discount points and are tax deductible.
When is it a good idea to pay for discount points?
For example on a $250,000 home loan with an interest rate of 4.5% will have a payment of $1,610. If you purchase 4 points for a total of $10,000 bringing your interest rate down to 3.5%, the total monthly payment is reduced to $1,466. This is a savings of $154 per month. Around $1,850 per year. The points will pay for itself in 55 months, and will save you $55,440 over the course of a 30 year loan.
How discount points affect your monthly payment ($100,000 loan amount)
Assuming 1/4 rate drop per discount point
- 0 discount points – Rate 4.5% – Payment $507 – $1,000 upfront
- 1 discount points – Rate 4.25% – Payment $492 – $1,000 upfront
- 2 discount points – Rate 4.0% – Payment $477 – $2,000 upfront
- 3 discount points – Rate 3.75% – Payment $463 – $3,000 upfront
- 4 discount points – Rate 3.5% – Payment $449 – $4,000 upfront
The monthly payment is reduced by about $15 for every point you purchase for every $100,000 loan amount.
What The Current Mortgage Rates?
Deciding whether or not to buy discount points is something that depends on the borrower. Don’t pay for discount points if you know you are not staying in the home for 5 years or more If you plan on staying in the home for more than 5 years then discount points can save you tens of thousands of dollars over the life of your mortgage.