In the United States, it's common practice to buy mortgage points as part of a home buying process. But what are they, and how can you use mortgage points to help you own a home?
There are two kinds of mortgage points: discount points, and origination points. Either way, each point is worth 1% of the total mortgaged amount. So, for a $500,000 home, a single mortgage point is worth $5,000. Origination points go toward compensating loan officers, whereas discount points act as prepayments on the loan's interest rate.
Not every mortgage lender requires purchasing origination points, and sometimes the price is negotiable. Origination points cannot be deducted from your taxes.
Each discount point lowers your interest rate by about 0.25%, and you can usually only buy up to three discount points. Discount points are tax deductible. Discount points are the main focus of this article, because they can reduce your monthly mortgage payments.
It's worth noting that many advertisements for mortgage rates, are based on the expectation that you will purchase mortgage points.
Should You Buy Mortgage Points?
There are two main questions to consider when deciding whether or not to buy discount points. The first question is: How long will you own the home? The longer you plan on living in the home, the more benefit you'll get out of your discount points. Here's an example:
You would pay $3,000 total for the three discount points, and you would save $47.35 per month. If you continue owning the home for the full 30 year duration of your mortgage, that's a total savings of $17,046 on monthly mortgage payments. On the other hand, if you lived there only 5 years you would save less than the $3,000 you spent on discount points.
There are web-based calculators on the internet to help you figure out the right number of discount points to buy, based on the home you're buying and how long you plan on owning the home.
The second question to ask when considering discount points for your mortgage: Can you afford them? The down payment, closing costs, moving costs and other expenses sometimes stretch a new homeowner to the financial limit. It may be the case that your future financial situation will be far better than your present situation. Even though it would save money in the long term, discount points can be unrealistic if the added cost puts the home out of reach.
You might have heard the advice that you should avoid discount points and instead invest in something else, such as stocks. The stocks have a chance of bearing much larger gains than what you'd save on your mortgage by buying mortgage points. However, the average homeowner isn't prepared to take such a risk in order to save money on a home loan.
Unless you're a real estate investor, the question of discount points has little bearing on the eventual sale of a house. When it comes to the home that you live in, the eventual sale price will probably be comparable to the new home that you'd move into afterward. Even if your home triples in value, so too will the average market price triple. So, discount points are really about saving money for your primary residence or homes you plan on keeping.
So, Should You Buy Mortgage Points?
This is a case-by-case question, and no single article written for a general audience can answer it for you. Find a mortgage point calculator online and plug the figures from your mortgage offers into them, and play with the numbers. This will give you a clear picture of your initial and long-term costs with, and without mortgage points.
Don't forget to also play with the down payment number, and please make sure that you comparison shop when you select your mortgage offer. Learn the mortgage borrowing process and explore your options - that's the only real way to get the best value on an affordable mortgage for your new home.
There are two kinds of mortgage points: discount points, and origination points. Either way, each point is worth 1% of the total mortgaged amount. So, for a $500,000 home, a single mortgage point is worth $5,000. Origination points go toward compensating loan officers, whereas discount points act as prepayments on the loan's interest rate.
Not every mortgage lender requires purchasing origination points, and sometimes the price is negotiable. Origination points cannot be deducted from your taxes.
Each discount point lowers your interest rate by about 0.25%, and you can usually only buy up to three discount points. Discount points are tax deductible. Discount points are the main focus of this article, because they can reduce your monthly mortgage payments.
It's worth noting that many advertisements for mortgage rates, are based on the expectation that you will purchase mortgage points.
Should You Buy Mortgage Points?
There are two main questions to consider when deciding whether or not to buy discount points. The first question is: How long will you own the home? The longer you plan on living in the home, the more benefit you'll get out of your discount points. Here's an example:
- Mortgaged amount: $100,000
Interest rate: 6%
Normal monthly payment: $599.55
- On the same mortgage after buying three discount points:
Interest rate: 5.25%
Discounted monthly payment: $552.20
You would pay $3,000 total for the three discount points, and you would save $47.35 per month. If you continue owning the home for the full 30 year duration of your mortgage, that's a total savings of $17,046 on monthly mortgage payments. On the other hand, if you lived there only 5 years you would save less than the $3,000 you spent on discount points.
There are web-based calculators on the internet to help you figure out the right number of discount points to buy, based on the home you're buying and how long you plan on owning the home.
The second question to ask when considering discount points for your mortgage: Can you afford them? The down payment, closing costs, moving costs and other expenses sometimes stretch a new homeowner to the financial limit. It may be the case that your future financial situation will be far better than your present situation. Even though it would save money in the long term, discount points can be unrealistic if the added cost puts the home out of reach.
You might have heard the advice that you should avoid discount points and instead invest in something else, such as stocks. The stocks have a chance of bearing much larger gains than what you'd save on your mortgage by buying mortgage points. However, the average homeowner isn't prepared to take such a risk in order to save money on a home loan.
Unless you're a real estate investor, the question of discount points has little bearing on the eventual sale of a house. When it comes to the home that you live in, the eventual sale price will probably be comparable to the new home that you'd move into afterward. Even if your home triples in value, so too will the average market price triple. So, discount points are really about saving money for your primary residence or homes you plan on keeping.
So, Should You Buy Mortgage Points?
This is a case-by-case question, and no single article written for a general audience can answer it for you. Find a mortgage point calculator online and plug the figures from your mortgage offers into them, and play with the numbers. This will give you a clear picture of your initial and long-term costs with, and without mortgage points.
Don't forget to also play with the down payment number, and please make sure that you comparison shop when you select your mortgage offer. Learn the mortgage borrowing process and explore your options - that's the only real way to get the best value on an affordable mortgage for your new home.