When you are in the process of getting a mortgage, one thing your mortgage lender may be offering you is the ability to put points toward the mortgage. This is essentially a way to lower how much you pay in interest by paying more up front. It can be a bit of a gamble if it will pay off for you in the end, but it can be worth it to save significant money over the length of the loan. Here are some questions you likely have about mortgage points.
Are Points Expensive?
It is common for points to be based on how much you are borrowing for your loan, not the cost of the house. Lenders can provide flexibility in terms of how much a point will cost, but it is approximately 1% of your loan's value for 1 point. Each point will lower your interest rate by .25%
For example, if you have a $250,000 house that you are putting a 20% down payment on, you will have a $200,000 loan. As a result, each point will cost you $2,000. If you wanted to reduce your loan's interest rate from 4% to 3%, you would need to pay $58,000 up front, which breaks down to a $50,000 down payment and $8,000 in points.
As you can imagine, buying points requires you to have a lot of up-front cash in order to see the savings.
Are Points Always Worth Buying?
One thing to understand about points is that they are not always worth buying. While a reduced interest rate may seem appealing, know that it is money you are paying up front for reduced interest rates over time. If you ever sell your home before the mortgage is paid off, that money paid for points is essentially lost.
You will need to work with your mortgage lender to find out when the break-even point is for purchasing points. They'll look at how much the points cost, how much you'll save in interest, and how many months it should take to save that amount. If you'll be staying in the house for the minimum amount of time to break even, then buying points will be a wise purchasing decision. If you will be selling before the break-even point, it is not worth it.
Keep in mind that points are an expense that you can use as a write-off expense on your taxes. You could also see some tax benefits to factor into the overall break-even point.
For more information on your home mortgage options, contact a lender like Advanced Mortgage Lenders Co.
When I started my own company, I knew that I needed a little business capital and fast. In an effort to raise money, I worked with various lenders to discuss loans, financing, and special terms. Unfortunately, I quickly discovered that not every loan was created equally. Some loans had almost predatory terms like high interest rates and penalties, while others were completely fair. Fortunately, a business consultant of mine taught me about loans and financing, so that I could make better choices in the future. The information on this blog saved my business, and I know that it can help yours too.