What Are Mortgage Points And Are They Worth It?
Jamie Johnson4 minute read
January 11, 2022
Whether you’re looking to buy a new home or refinance in the coming year, you want to score the lowest interest rates possible. And one way to lower your interest rate is by purchasing mortgage points.
Mortgage points will help you lock in a lower interest rate and save money over the life of the loan. Understanding what mortgage points are and how they work will help you determine whether it’s the right strategy for you.
What Are Mortgage Points?
Mortgage points – also referred to as mortgage discount points – are fees you pay directly to your lender in exchange for a rate discount. Essentially, you pay money upfront and earn a lower interest rate over the life of the loan.
Mortgage points can be beneficial to both borrowers and lenders. By making a one-time upfront payment, you’ll lower your mortgage interest for the remainder of the loan. And purchasing mortgage points gives your lender added assurance that you’ll repay your mortgage.
How Much Do Mortgage Points Cost?
Before you invest in mortgage points, it helps to understand the cost of the points. One point costs 1% of your total home loan. That means if you take out a $300,000 mortgage, you’ll pay $3,000 for 1 mortgage point.
These discount points are paid when you close on your home. So at closing, your lender will calculate how many mortgage points you agreed to purchase. The cost of the points will be rolled into your closing costs.
How Do Mortgage Points Work?
When you close on your mortgage, you have the option to buy mortgage points in exchange for a lower interest rate. Each point costs 1% of your total home loan, so the more you borrow, the more you’ll have to pay for mortgage points.
And since you buy mortgage points at closing, this will raise the upfront cost of purchasing a home. However, you’ll earn a lower interest rate which will lower your monthly payment and can add to your monthly savings.
Each mortgage point reduces your interest rate by a certain amount. For instance, some lenders offer a 0.25% interest rate reduction for each point purchased. So, if your original interest rate is 5.25%, buying 1 mortgage point will lower your rate to 5%.
Mortgage Points Calculator
It’s not cheap to purchase mortgage points, so before you do it, it can be helpful to understand how much money you can save in interest. The best way to do that is to use a mortgage calculator to estimate your potential monthly payments.
For instance, let’s say you’re taking out a $300,000 30-year fixed-rate mortgage, and your current interest rate is 5.25%. Before taxes and insurance, your monthly payment would be $1,656.61.
If you lower your interest rate to 5%, you can expect to pay $1,610.46 each month. It’s not a substantial difference, but it will add up over time. You can expect to pay $ 279,767.35 in interest at the reduced interest rate.
With the original interest rate, you’ll pay $296,380.00over the course of the loan. That means, by purchasing a point, you’ll save over $16,612.65, much more than the original $3,000 you paid to purchase the mortgage point.
Buying Mortgage Points: Is It Worth It?
In certain situations, buying mortgage points can make sense. For instance, if you plan to stay in your home for a long time, you’ll end up recouping your upfront costs. Here are some of the biggest pros and cons of buying discount points.
- You’ll earn a lower rate on your mortgage.
- Your monthly payment will be lower after the mortgage points are applied.
- You’ll save money on your mortgage over time – it’s helpful to calculate your breakeven point before buying points.
- You’ll have higher upfront costs when you close on your mortgage.
- Mortgage points may not make sense if you don’t plan to stay in the home for a long time.
Mortgage Point FAQs
Let’s look at some of the most commonly asked questions about mortgage points.
Are mortgage points tax deductible?
Yes, mortgage points are usually a tax-deductible expense. The IRS will let you deduct the total cost from your taxes the year you bought mortgage points.
Mortgage points are usually considered an itemized deduction and claimed on Schedule A of Form 1040. It may be a good idea to talk to an accountant to ensure you qualify for this deduction and itemize it correctly.
Can you negotiate mortgage points?
Yes, you can always negotiate with your lender for better rates and fewer fees. However, it’s best to go into negotiations with a strategy. Make sure you receive quotes from multiple lenders so your lender will have more incentive to make their rates look better.
Can you purchase mortgage points after closing?
Mortgage points are purchased when you close on your home, so after closing, it’s too late to buy points after your closing costs have been paid. However, you can purchase mortgage points if you decide to refinance your home in the future.
The Bottom Line
If you plan to stay in your home for 10 years or more, buying mortgage points may be a good strategy. When you purchase mortgage points, you pay a one-time fee for a lower interest rate.
Make sure you know what your breakeven point is before paying for points. This will help you determine whether it’s a worthwhile investment for you. Check out this article if you’re ready to learn about the next stage of the mortgage process, loan processing and other steps in the home buying journey.
Apply For A Mortgage Online
What You Need To Know When Buying A House
Owning a home can be a rewarding milestone in your life, but only if you’re ready for it. Here’s what you need to know when buying a home.