Before you decide if you should buy mortgage points, you need to figure out if buying them will save you money in the long run. The way you find this out is inputting known (or estimated) figures into our mortgage points calculator.
Mortgage points are some of the most confusing parts about buying a house. So if you're confused, don't worry, our Q&A will answer all your questions. We take a closer look at what mortgage points are, how they work, and when they are beneficial.
A mortgage points calculator takes many factors into consideration and calculates the result of buying mortgage points.
This can help you determine whether to purchase the discount points or put more money into the down payment.
It's a helpful tool that lets you know if you would save money by buying mortgage points or if your money is better spent else where.
Some have devised "shortcuts" in getting to the final comparison number, so keep that in mind if you see different online calculators.
In the U.S., buying mortgage points is common to lower your interest rate from the lender. There are two types of mortgage points: origination and discount.
Origination points compensate loan officers for evaluating, processing and approving loans.
Keep in mind that not all mortgage lenders use origination points but ones that do may negotiate the fee paid to the officer. These points get based on the complexity of your application and aren't tax deductible.
Discount points, in simple terms, are prepaid interest on your loan.
They're tax deductible as long as they aren't used to pay for closing costs and fees. The IRS states as a general rule, that you can deduct the interest paid on your mortgage and you can deduct your points.
The more discount points you buy, the lower your interest rate is.
Buying discount points is often referred to as "buying down the rate" because that's what you're doing.
A point costs 1% of the mortgage. An easier way to think of it is a point is worth $1,000 for every $100,000 financed.
Percentage-wise, buying a mortgage point can lower your rate by approximately 0.25%.
So if you buy two points on a $250,000 mortgage, you will pay 2% or $5,000. But, your interest rate on the mortgage will drop from 4.5% to 4%.
Most traditional lenders will allow you to buy one to three points. Some will go as many as four points.
No, mortgage points don't affect your down payment. It only comes into play when deciding if it's better for you to pay for a lower interest rate or to take the standard rate and put more money down.
If you plan to own your home for a long time, or until you pay your mortgage in full, it makes sense to buy mortgage points.
The mortgage amount is $250,000 for 30 years with a 4% point rate. The number of points bought is 2, which means the fee you will pay for your points is $5,000.
The monthly payment will be $1.193.54.
The amount financed will be $245,000 with a 4.5% interest rate.
The monthly payment amount is $1,241.38.
$47.84 per month or $5,740 over 10 years.
That means this theoretical homebuyer will break even on the discount points within 10 years.
After 20 years, his or her net savings increase to $8,376 ($13,376 total savings - $5,000 cost of points).
This example shows us that the longer you stay in the home, the more beneficial it is to buy points.
It's a common mistake to confuse mortgage points with negative points or rebate points.
Negative points are when your lender gives you the option of paying some of your fees in exchange for you having a higher interest rate.
Negative points get paid to your broker or to you. If paid to your broker, they lower the commission you pay for their services at the closing. If paid to you, they offset the cash in hand needed at the closing.
The trade-off is that the lender gets more in interest. Negative points are a percentage of the principal sum of money you would originally finance.
This procedure is also called a no-cost mortgage. You're paying fewer costs (or no costs at all) at closing and instead opting to spread the amount (and a little more) over the term of the mortgage.
Buying a house is exciting, scary, and confusing all at the same time. Many of the questions you have about financing and buying a house can get answered with many different financial calculators.
You already know the benefits of using a mortgage points calculator, but at GC, we have many mortgage calculators to help answer all your mortgage questions.