Mortgage points, sometimes called discount points, are fees that you pay in exchange for a lower interest rate. The common reason that people "buy down the rate" is that the lower interest rate may lower their monthly mortgage payment.
Calculating the cost of a point is fairly simple. One point equals 1% of the total loan amount. For example, if your loan amount is $120,000, then one point would cost $1,200, and you would pay this amount at closing.
Paying an additional $1,200 might sound counter-intuitive, but there are several instances where this makes the BEST sense. Here's how we figure out if buying mortgage points is a smart move.
The first thing you should know is that buying mortgage points is a "long-term" game plan. In other words, if you plan on staying in your home for less than 5 years, then buying points may not be the best move. The reason is that points help you to save over the life of the loan --so the longer you have the loan, the more you end up saving!
While there is no limit to the point you can buy, there are limits as to how much you can pay in closing costs. These limits vary state by state.
Remember that paying for points saves you money over the life of the loan. However, you also want to consider the "break-even" point, that is, the period where the fees you paid upfront equals the amount you are saving on your monthly mortgage payment.
So, for example, in a $150,000 loan at a rate of 4.99% for 30 years, paying $1,875 for 1.25 points and lowering the rate to 4.75. The monthly mortgage payment would be reduced by about $22 and would result in nearly $8,000 in savings over the life of the loan.
In this example, the break-even point would be right about year 7. So paying for points in this situation would make sense if you plan on living in the home for more than 7 years.
Here is another example using the same 30-year loan:
If you were to pay $2,625 for 1.75 points, this would reduce your monthly payment by about $45 and save you nearly $16,000 over the life of the loan. The break-even point in this example would be in year 5.
Although there are other variables to take into consideration, you can see how points work to save you money as well as why it makes sense only if you plan on staying in your home for several years.
Mortgage points are considered a pre-paid interest and may be tax-deductible. Talk to your tax preparer for more information on the tax benefits of buying mortgage points.
During your mortgage process, you might hear about both mortgage points and origination points. It's important to remember these two phrases refer to two different points. Mortgage points are a fee you pay to lower your interest rate. Origination points are a services fee that goes to your mortgage professional.
This is just the tip of the iceberg when it comes to the factors of buying mortgage points. If you want to find out if it makes sense in your situation, please contact us! We'll look at the big picture, from every which way, and guide you through the most affordable mortgage option for you and your goals.
We've been helping customers afford the home of their dreams for many years and we love what we do and think you will too.
Company NMLS: 184318
CA DRE License #01848949
4747 Morena Blvd, Suite 310
SAN DIEGO, California 92117
Phone: (619) 283-4000
Mortgage Alliance Group strives to ensure that its services are accessible to people with disabilities. Mortgage Alliance Group has invested a significant amount of resources to help ensure that its website is made easier to use and more accessible for people with disabilities, with the strong belief that every person has the right to live with dignity, equality, comfort and independence.
Mortgage Alliance Group makes available the UserWay Website Accessibility Widget that is powered by a dedicated accessibility server. The software allows www.mortgage-alliance.net to improve its compliance with the Web Content Accessibility Guidelines (WCAG 2.1).
The Mortgage Alliance Group accessibility menu can be enabled by clicking the accessibility menu icon that appears on the corner on the page. After triggering the accessibility menu, please wait a moment for the accessibility menu to load in its entirety.
Mortgage Alliance Group continues its efforts to constantly improve the accessibility of its site and services in the belief that it is our collective moral obligation to allow seamless, accessible and unhindered use also for those of us with disabilities.
Despite our efforts to make all pages and content on Mortgage Alliance Group website fully accessible, some content may not have yet been fully adapted to the strictest accessibility standards. This may be a result of not having found or identified the most appropriate technological solution.
If you are experiencing difficulty with any content on Mortgage Alliance Group website or require assistance with any part of our site, please contact us during normal business hours as detailed below and we will be happy to assist.
If you wish to report an accessibility issue, have any questions or need assistance, please contact us by sending an email to: firstname.lastname@example.org