Why would you want to pay mortgage points?
Mortgage points can be your best friend. However, before we go any further, let me explain what mortgage points are.
A mortgage point is a fee in the amount of one percent of the mortgage amount. For example, if your mortgage amount is $400,000, the fee is $4000. This isn’t a fee that you’re required to pay, it’s an optional fee. So, why would you voluntarily pay a $4000 fee? The answer is because it may be in your best interest to do so. Let me explain further.
The are two kinds of mortgage points, Discount Points and Origination Points.
Mortgage Discount Points
A Discount Point is prepaid interest on the loan. When you pay discount points, you’re lowering the interest rate on the mortgage. As a result, your monthly payment will be less. The discount point(s) you pay at closing may be tax deductible in that tax year. Please check with your accountant to verify that.
Mortgage Origination Points
An Origination Point is a fee which is charged by the lender, and isn’t optional. This fee is used to cover the lender’s expenses of making the loan. Currently they are tax deductible if they are used to pay necessary costs to obtain the mortgage, not for closing costs. Again, check with your accountant for verification.
Please remember, I’m a Realtor. I’m not an accountant, nor do I play one on TV. Get financial advice from your accountant or a financial adviser. However, when you’re ready to either buy or sell a home, please call me.
Why Would I Pay Points ?
It’s a simple math calculation as to whether or not you should pay points. Have your mortgage representative to calculate the monthly principal and interest costs for a mortgage with and without points. By paying two points at closing, you may be able to reduce your interest rate by half a point. If you take a $200,000 30 year loan at 4%, your monthly payment will be $955. By reducing the interest rate to 3.5%, your payment will be $898. This would result in a $57.00 per month savings. My limited math skills show me that in 70 months you will be ahead of the game. In addition, paying more points would result in even more savings.
Pre-paying mortgage points would probably be beneficial to you if you plan on staying the home for more than 6 years. However, if pre-paying points uses part of your down payment cash, that may change the equation. If it causes you to pay Private Mortgage Insurance, or causes an increase in your Private Mortgage Insurance, it may not be beneficial. This is also part of the analysis your mortgage lender can help you with.
Do the math, do your research, then make your decision as to whether it’s in your best interest to prepay mortgage points. But when you’re ready to find your new home, let me help you.
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