Purchasing a house is probably the most expensive investment most of us will make. Thus, anything that helps cut down the cost of the home loan is worth taking a look at. Apart from negotiating for a reasonable price on your house, you can shop for the best mortgage rates. Some home buyers prefer investing in mortgage points that help lowers the amount of interest you will have to incur on your home loan.
What are Mortgage Points?
Mortgage points, also popularly known as discount points, refer to the lender’s fee for trimming the interest rate on the mortgage loan. This is also referred to as buying down the rate and can significantly reduce your monthly mortgage payments.
One mortgage point costs one percent of your mortgage value. Each point lowers the interest rate, usually by 0.25 percent. Homebuyers can purchase more than one mortgage point and even fractions of an issue. A half-point on the mortgage can reduce the interest rate by 0.125 percent and help significantly.
Each mortgage point’s value and how much it lowers the home loan interest rates vary from one lender to another. The rate-lowering power of mortgage points also depends on the kind of mortgage loan and the overall interest rate applicable to the amount. The payment for the purchase of mortgage points is listed on the loan documents. Detailed information can also be found on the Closing Disclosure that the borrowers receive while closing the loan.
For more detailed information on mortgage points, feel free to go through the official disclosure* by the U.S. Government’s Consumer Finance website.
How Mortgage Points can Cut Down Interest Costs?
If you are eager to purchase mortgage points after making a down payment on your house and covering the closing costs, then you can save a lot of money over your monthly mortgage payments. The key lies in staying in the home for a long time to recover the prepaid interest. If the buyer sells the property in just a few years, then purchasing mortgage points would only be a waste of money.
Here is an example of how mortgage points can cut down costs on a 20-year fixed-rate mortgage for a loan amount of $300,000.
$6,000 Rate of Interest 3% 2.5% Loan Principal $300,000 $300,000 Monthly Payment $1,664 $1,590 Interest Total $99,311 $81,527 Lifetime savings None
In this example, the borrower has purchased two discount points, with each end costing 1 percent of the principal amount. By purchasing two issues for $6,000, the borrower’s interest rate has lowered to 2.5% from 3%, reducing the monthly payment by $74 and saving $17,784 in interest over the entire loan term.
For estimating the break-even point, you need to divide the cost incurred over the purchase of mortgage points by the amount the reduced interest rate saves each month.
$6,000 / $74 = 81 months
This implies that the borrower needs to stay in the purchased home for 81 months or more to recover the mortgage points’ cost. This is why paying more for mortgage points for lowering the monthly payments seems an ideal option if you plan to retain the property for a long time.
Are Mortgage Points Tax-Deductible?
There are two varieties of mortgage points: Discount Points and Origination Points. No matter what the case is, each point equals one percent of the total amount mortgaged. For instance, on a home loan of $400,000, one mortgage point is equal to $4,000.
Origination points are utilized for compensating loan officers. Not all mortgage providers request the payment of origination points and are willing to negotiate the fees. Discount points are more like prepaid interest. Purchasing each point lowers the interest rate on a mortgage by 0.25 percent. However, most lenders allow the buyers to buy anywhere from one to three discount points.
Before implementing the new tax law in 2017, origination points were not subjected to tax benefits. However, now discount points are also deductible but limited to the first $750,000** of the loan. You can check with a tax accountant to identify if you could receive tax benefits from purchasing mortgage points or not.
Are Mortgage Points Worth It?
For a homeowner who fears getting into mortgage debt, the potential benefit of purchasing mortgage points is the right investment. It is essential to pay off the housing loan comfortably, and it can happen only if the monthly interest is affordable. Mortgage points help you save money over your monthly interest payments.
Many homebuyers invest with the hope of watching their property’s worth increase in the future. However, for some, it is more of an investment. If the property is worth triples, you would likely want to sell it off to make a profit. You save a lot of money on your taxes by opting for mortgage points, making the entire investment a profitable deal for the investors.
Investing in a property is a significant financial decision anyone can take. You need to plan carefully and consider the numbers before actually shopping for mortgage points. Buying mortgage points is a big money-saver if you can afford it. You will reap interest savings and will also save on the taxes. Don’t settle for any package that you stumble across first. There are plenty of options available that you can choose from. Make sure to take a look around carefully before settling on the best deal for your investment.