What Are Mortgage Points & How Do They Work? [With Advanced Tips!] Roger Odoardi There’s a lot that goes into buying a home and securing a mortgage, including looking into interest rates and determining down payments. Along the way, you may have heard of something called mortgage points — but what are they, and are they right for you? In this comprehensive guide, we’ll explain their benefits, provide examples and tips, and help you determine whether mortgage points make sense for you and your situation. What Are Mortgage Points? Mortgage points are fees that you pay to a lender in exchange for a reduced interest rate, which in turn can lower your monthly mortgage payment. These points are also known as “discount points” and are paid at closing. How Do Mortgage Points Work? One point costs 1% of your total loan (or mortgage) amount. For example, if your mortgage is $100,000, a point would cost $1,000. The idea is that you pay some interest up front in exchange for a lower interest rate over the life of your loan. In most cases, one discount point lowers your mortgage interest rate around one-eighth to one-quarter of a percent. But this number will depend on your mortgage lender. Benefits of Mortgage Points The main benefit of mortgage points is that you’ll receive a lower interest rate over the life of your loan, which can save you thousands of dollars in the long run. Mortgage points can be tax deductible, but there are some conditions, such as the fact that your loan must be secured against your home. You also need to provide the lender with the money directly up front upon purchasing the points. Are Mortgage Points Right For You? There are several factors to consider when it comes to mortgage points. First, you need to determine if you have enough available cash, since mortgage points require an up-front payment. This is in addition to your down payment and closing costs. Also, how long are you planning to own your home? Buying points to lower your interest rate makes sense if you select a fixed-rate mortgage and plan on owning your home for a long time (after you’ve reached the break-even period). Mortgage points can save you a lot of money, but there are additional costs up front you need to consider. What Is the Break-Even Point? This refers to the point in time at which the amount you’ve spent up to purchase points is exceeded by the amount you have saved. The longer you stay in this situation, the more you will benefit financially from discount points. Discount Points vs. Origination Points Origination points are essentially a way for paying closing costs. These points, which are negotiable, cover the lender’s cost when it comes to processing the loan. These points, however, aren’t tax deductible. Frequently Asked Questions (FAQs) Section Q: Is it worth it to buy points on a mortgage? A: Maybe — it just depends on your situation. Do you have available cash up front to purchase mortgage points? Are you planning on staying in your home for a long time? If the answer is yes to those questions, you may want to consider purchasing points to reduce the interest rate over the life of your loan. Q: How many points can I buy? A: There is not a fixed maximum, but there are state and federal regulations in place to make sure a borrower doesn’t overpay to the point where the cost of the points outweighs the benefit of the lower rate. Q: Is there a standard rate reduction for buying points? A: Typically, one point costs 1% of your mortgage amount. For example, if your loan amount is $100,000, one point would cost you $1,000 at the time of closing. Q: How do points work if I have an Adjustable Rate Mortgage? A: At the end of the fixed Adjustable Rate Mortgage (ARM) period, the rate will adjust. Usually, the mortgage points line up with the initial fixed rate. Q: Are mortgage points negotiable? A: Points are not negotiable. Each lender has a specific rate discount associated with the points being paid. Interested in Mortgage Points? If you’re interested in learning more about mortgage points, or think they may be right for you, we encourage you to talk to a mortgage specialist. With decades of collective mortgage industry experience, Blue Water Mortgage’s brokers have the expertise to help you make an informed decision. Contact us today to set up a free call and get started.