- August 19, 2017
- Posted by: steve
- Categories: mortgage news, points
We’re telling you everything you need to know about mortgage points. We’re covering what they are and how they affect your loan process.
A house is easily one of the biggest purchases you’ll make in your lifetime.
Chances are, you’ll be financing this purchase with a mortgage. But did you know that you can reduce your monthly payments through mortgage points?
What Are Mortgage Points?
There are two different types of mortgage points – origination points and interest points.
Origination points are applied to the loan officers. If you’ve gotten pre-qualified for a mortgage in the past, you’ll remember seeing an origination fee among the closing cost breakdown. Origination points are applied to this cost.
Interest points are an additional amount paid to your mortgage lender upfront in exchange for a lower interest rate.
One point is equal to 1 percent of the amount of the mortgage (which is separate from the purchase price).
For example, if you’re buying a house for $200,000 and have a 20% down payment, the mortgage amount will be $160,000. Purchasing one point on this mortgage will mean paying an additional $1,600 at closing.
What Are the Benefits?
The main benefit of points is that this is a one-time payment that will lower your costs over time.
Interest points are popular because they reduce your monthly costs over the lifetime of your loan.
Paying an extra couple of thousand dollars now can easily save you tens of thousands of dollars over the course of your mortgage.
This is a major benefit if you plan on staying in your home long term.
Either way, you’ll be saving money each month. Still, it will be a few years before you reach the break-even point. It’s important to calculate your savings. Think about how long you plan to stay in the house to determine if this is worth it in your case.
How Much Will You Save?
As a rule of thumb, each point that you buy will mean 0.25% taken off your interest rate. It may not seem like much at first, but these savings add up on such a large purchase.
You can easily save between $30 to $100 per month. This will depend on your mortgage amount and the number of points you buy.
Again, it may not seem like much when you’re looking at a monthly bill that includes principal, taxes, and insurance. But this amount can actually offset the insurance costs. It might even be enough to cover other expenses like certain utilities or cable.
Crunching the Numbers
Buying a house is a major decision.
You’ll have a lot of factors to consider when determining your budget and what financing options are right for you.
Purchasing mortgage points may seem like just another added cost to an already expensive enterprise. Still, take the time to do the math.
It won’t be the right choice for everyone, especially those who may be moving again within a few years.
But if you are confident that you’ll be staying in this home for a long period of time, this is definitely something to consider.
To give you some perspective, it may be 10 years before you hit your break even point. This is the point where your savings now equal the amount that you paid at closing.
Ready To Learn More?
Make sure you speak with your mortgage lender to see how many points you can afford, and at what point you’ll be breaking even. If you plan to stay in your home longer than that, then this is a worthwhile savings strategy.
Want to learn more about mortgage points and if they’re right for your purchase? Contact us for more information.