What Are Mortgage Points & Should You Pay Them?
Under certain circumstances, buying mortgage points when you purchase a home can save you significant money over the course of your loan. But it’s important to understand how they work and how long it takes for the additional upfront cost to be worthwhile. So this week, Mortgage Headquarters of Missouri is sharing with you some information on what points are and how they work.
What Are Points, and How Much Do They Cost?
"Points" are really called "Discount Points." Mortgage points are fees paid directly to the lender at closing in exchange for a reduced interest rate. Technically, they're considered pre-paid interest. One point = 1% of the loan amount. In general, the longer you plan to own the home, the more points help you save on interest over the life of the loan.
Example: 1 point on a loan of $100,000 = $1,000.
Should I Pay Them?
When you consider whether points are right for you, it helps to run the numbers. Divide the upfront cost by the monthly savings to determine the break-even period. If you intend to own the property beyond that time, you have the initial basis for a decision.
Example: If you pay one point on a $100,000, 30-year loan to discount your rate by 0.25%, you’ll save $15.17 per month. Divide the $1,000 cost by the monthly savings to calculate a break-even point of 65.9 months.
The Rest of the Equation
Points can be tax deductible in the year paid on purchase loans and over the life of the loan on refinances (always consult with your tax professional for advice). A lower real cost could shorten the break-even period.
Purchase Example - $1,000 paid less 28% tax deduction = net cost of $720 divided by $15.17 per month = break-even period of 47.5 months
The risk
Once points are paid, the money is gone. If you sell or refinance before the break-even point, the difference will be a loss. It’s important to consider how long it takes to recoup the cost of buying points. This is called the break-even period. To figure it out, divide the cost of the points by how much you save on your monthly payment. The resulting number is how long it takes for the monthly payment savings to equal the cost of the points.
Alternatives
Add to your down payment instead. The monthly savings are not as big, but there’s no break-even to reach. Plus, the money still belongs to you (as part of your home’s equity). Or you can save the money. Cash reserves sometimes prove more valuable than a slightly lower payment.
Example: Borrowing $1,000 less at 5% on a 30-year loan will save $5.37 per month.
Bottom Line
Think about whether you plan to be a short-term or long-term owner and then assess whether you are more comfortable with a lower payment, more cash reserves, or more equity. Also consider whether you might refinance at some point prior to breaking even on the cost of any points. Each option has its own merits and risks. At MHQ Mortgage Headquarters, we've got more than 20 years of experience in assisting people with these types of decisions. Let us help with your calculations and decisions. We'll be happy to help you get started!
Mortgage Headquarters of Missouri, Inc
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065
Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917
Email: info@mhqmortgage.com
NMLS # 1229111
What Are Points, and How Much Do They Cost?
"Points" are really called "Discount Points." Mortgage points are fees paid directly to the lender at closing in exchange for a reduced interest rate. Technically, they're considered pre-paid interest. One point = 1% of the loan amount. In general, the longer you plan to own the home, the more points help you save on interest over the life of the loan.
Example: 1 point on a loan of $100,000 = $1,000.
Should I Pay Them?
When you consider whether points are right for you, it helps to run the numbers. Divide the upfront cost by the monthly savings to determine the break-even period. If you intend to own the property beyond that time, you have the initial basis for a decision.
Example: If you pay one point on a $100,000, 30-year loan to discount your rate by 0.25%, you’ll save $15.17 per month. Divide the $1,000 cost by the monthly savings to calculate a break-even point of 65.9 months.
The Rest of the Equation
Points can be tax deductible in the year paid on purchase loans and over the life of the loan on refinances (always consult with your tax professional for advice). A lower real cost could shorten the break-even period.
Purchase Example - $1,000 paid less 28% tax deduction = net cost of $720 divided by $15.17 per month = break-even period of 47.5 months
The risk
Once points are paid, the money is gone. If you sell or refinance before the break-even point, the difference will be a loss. It’s important to consider how long it takes to recoup the cost of buying points. This is called the break-even period. To figure it out, divide the cost of the points by how much you save on your monthly payment. The resulting number is how long it takes for the monthly payment savings to equal the cost of the points.Alternatives
Add to your down payment instead. The monthly savings are not as big, but there’s no break-even to reach. Plus, the money still belongs to you (as part of your home’s equity). Or you can save the money. Cash reserves sometimes prove more valuable than a slightly lower payment.
Example: Borrowing $1,000 less at 5% on a 30-year loan will save $5.37 per month.
Bottom Line
Think about whether you plan to be a short-term or long-term owner and then assess whether you are more comfortable with a lower payment, more cash reserves, or more equity. Also consider whether you might refinance at some point prior to breaking even on the cost of any points. Each option has its own merits and risks. At MHQ Mortgage Headquarters, we've got more than 20 years of experience in assisting people with these types of decisions. Let us help with your calculations and decisions. We'll be happy to help you get started!
4824 Osage Beach Parkway, Suite 1
Osage Beach, MO 65065
Office: (573) 302-9990
Toll Free: (888)799-1206
Fax: (636)648-9917
Email: info@mhqmortgage.com
NMLS # 1229111
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