What’s the point of mortgage points?, by Adriana Montes.

By Adriana Montes

What’s the point of mortgage points?

There is no debate about it. Buying a home will be the most expensive single purchase you will probably make in your lifetime! As such, anything that you can do to reduce the cost of the mortgage might be worth discussing and therefore in this article, we are going to look at mortgage points, what they are and how they can help you get a good deal for your home purchase.

Mortgage points besides helping you negotiate a good price for your home, they can help you also help you get the best mortgage rates and for the experienced homebuyers, mortgage points will lower the amount of interest they pay.

WHAT ARE MORTGAGE POINTS

By now you know that mortgage points are a great way to lock in lower interest rate on the home purchase or even in refinancing. What you don’t know probably is that mortgage points are fees and as a borrower, you will pay the fees to the mortgage lender to trim the interest rate on the loan. This process is sometimes referred to as ‘buying down the rate’ where each point costs 1 percent of the mortgage amount.

Simply put, one mortgage point on a $250,000 mortgage would cost $2,500.

Each point typically lowers the rate by 0.25 percent therefore, one mortgage point would lower the mortgage rate of 4 percent to 3.75 percent for the life of the loan. However, it is good to understand that how much a point lowers the mortgage rate will depend on the lender, the type of the loan and the overall interest rate environment.

Borrowers in Florida interested in mortgage points can buy more than one point, and if that seems too much, mortgage points can be bought in fractions for instance, a borrower can buy half a point which amounts to $1,250 and lowers the mortgage rate by 0.125 percent.

You pay for the discount points at closing and are listed on the loan estimate document. They are also listed on the closing disclosure which a borrower will receive before the closing of the loan.

It is also worth noting that the mortgage points comes in two varieties;

• The originations points and • The mortgage points.

You already know what mortgage points are. Origination points are mostly used to compensate the loan officers and before the 2017 Tax Cuts and Jobs Act, origination points were not tax deductible, however, the mortgage points could be deducted on Schedule A. Moving forward, even though discount points are tax deductible, they are only limited to the first $750,000 of a loan.

Generally, remember, the longer the repayment period, the more point’s help you save on interest over the life of the loan.

So, are mortgage points right for you? Let’s look at a typical example.

No points 1 point 2 Points

Cost Per Point 0 $2,000 $4,000

APR* 4.5% 4.25% 4%

Monthly Payment** $1,013.37 $983.88 $954.83

Monthly

Payment

Savings N/A $29.49 $58.54

Break even (time to recover points costs) N/A 68 months 68 months

Total Payment Savings on a 30-year loan N/A $10,616.40 $21,074.40

**Note: the APRs and the points here are illustrative and educational in nature.

HOW DOES MORTGAGE DISCOUNT POINTS COMPARE WITH APR

Buying discount points is prepaying the interest. APR on the other hand is a way to facilitate the comparison of loans among different rate and point combinations. APRs incorporates more than the interest rates, they incorporates points you pay and then any fees that the lender charges for providing the credit.

SHOULD YOU PAY FOR DISCOUNT POINTS?

Before answering this pressing question, we need to first understand the mortgage payment structure. Basically, there are two factors that weigh heavily when considering an option to pay for the mortgage points. These are;

• The length of the time you expect to live on the house. • Your ability to pay for the mortgage points.

When considering the length of time you expect to live on the home, the general rule is, the longer the period, the bigger the savings.

Just to illustrate, a $100,000 mortgage with an interest rate of 3 percent will have you paying $421 per month. Supposing you bought 3 mortgage points, the interest rate would be 2.75 percent and the monthly mortgage payments would be $382 per month.

Simply put, purchasing 3 discount points will cost you $3,000 to save $39 per month. To breakeven, you will have to keep the house for at least 76 months.

A 30 year loan lasts for 360 months which means in this case, purchasing the discount points might be a wise move to make, especially if you are planning to live on the new home for a long time. The opposite is true, purchasing discount points with no intention of staying on the home for a long time might not make any sense at all. If you have to, I would suggest that you purchased few discount points.

There are numerous calculators online to help you determine the discount points you need pay based on the length of period you planning to stay on your new home.

The other factor to consider is your ability to pay for the discount points. Considering that many people barely afford the down payment and or the closing costs, I doubt whether they can have any money left for discount points. On a $100,000 home, 3 discount points may be fairly affordable, but on a $500,000 home, the cost of three mortgage points would be $15,000 which is quite high.

ARE MORTGAGE POINTS WORTH IT?

There are many people who believe that the money used to pay for mortgage points could be channeled elsewhere where there is a good return on investment, say in stock trading. However, for a first time homebuyer, the fear of not getting a mortgage they can afford outweighs all other potential investments.

BOTTOM LINE…

Plan carefully! Buying a home is a major financial decision as such, plan carefully. Look at the cost and whether it will be worth it. It is also important that you consider the amount of monthly payments that you will be comfortable paying. Also, take time shopping around. Do not settle for the first option you get. There are so many banks to choose from and if you would like to know your options, talk to Eric L. Frazier, MBA, a mortgage professional with over 30 years’ experience in the field. You can reach Eric at 800-261-1634 ext. 703.

ABOUT ADRIANA MONTES

Adriana Montes is a real estate broker/owner and director of divisions of REO Listings, Acquisitions, Rentals, Flips at Florida Dreams Realty Group. A dedicated professional with a long tenure in the default sector that includes over 20 years of experience servicing and selling over 1500 homes and over $300 million in volume within the last 10 years. To find out more about Adriana, go to; https://www.thepowerisnow.com/adrianamontes/

Sources

https://bettermoneyhabits.bankofamerica.com/en/home-ownership/buyingmortgage-points-lower-rate https://www.investopedia.com/mortgage/mortgage-rates/points/ https://www.bankrate.com/mortgages/mortgage-points/ https://www.rocketmortgage.com/learn/mortgage-points

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