Points on a mortgage, often called discount points, are fees you pay upfront to lower the interest rate on your home loan. Essentially, you're paying some of the interest in advance.
Understanding Mortgage Points
- Definition: A one-time fee paid to reduce the interest rate on a mortgage.
- Cost: One point typically equals 1% of the total loan amount. For instance, on a $300,000 mortgage, one point would cost $3,000.
- Purpose: To obtain a lower interest rate, potentially saving money over the life of the loan.
How Mortgage Points Work
When you buy a house or refinance your mortgage, you have the option to purchase points. Each point you buy lowers your interest rate by a certain percentage, typically 0.25% (this can vary by lender and market conditions).
Example:
Let's say you're taking out a $300,000 mortgage, and the lender offers you an interest rate of 7%. They also offer the option to buy points:
- Without points: $300,000 loan at 7% interest.
- With one point: $300,000 loan at perhaps 6.75% interest (costing you $3,000 upfront).
Should You Buy Mortgage Points?
Whether buying points makes sense depends on your financial situation and how long you plan to stay in the home. Consider these factors:
- How long will you stay in the home? If you plan to move within a few years, you may not recoup the cost of the points through the lower interest rate.
- Are you comfortable paying upfront costs? Points are paid at closing, so factor that into your overall budget.
- Compare the total cost: Calculate the long-term savings from the lower interest rate and compare it to the upfront cost of the points.
- Tax Implications: Mortgage points are typically tax deductible in the year you pay them, further offsetting the cost. Consult a tax professional for advice specific to your situation.
In short, mortgage points are a tool to lower your interest rate, but you need to weigh the costs and benefits to decide if they're right for you.
