You’ve worked hard to save for your down payment and are now looking for the perfect home. As you start the mortgage process, it’s important to get familiar with one of the most confusing terms to a homebuyer — mortgage points.
Check out these popular Q & A’s about mortgage points to find out if you should move forward with them, or leave them in the dust.
A: Mortgage points are also known as discount points. It’s basically prepaid interest on your loan— in other words, points let you make a trade-off between what you pay upfront at closing versus what you pay monthly later. It’s not always beneficial to “buy down” your interest rate. In fact, you could lose money.
A: Each point is equivalent to 1% of your total loan amount. For example, on a $200,000 mortgage, one point would cost you $2,000 directly out of your pocket. This money is in addition to your down payment and adds to your total closing costs. It’s important to note that a 1-point discount does not necessarily equal a 1% lower interest rate!
A: You don’t pay for points to get a tax break. And with the 2018 tax reform, things have changed with mortgage interest deductions. What hasn’t changed is the fact that the prepaid interest (or points) you pay when you take out a mortgage in 2018 is still 100% deductible in the year you paid it—if you itemize.
A: When you’re looking to see if points make sense for your situation, be sure to look at the entire picture. It’s important to consider how long it will take you to break even on the cost of buying points. To figure this out, divide the cost of the points by how much you’ll save on your monthly payment. This number is how long it will take for the monthly payment savings to equal the cost of the points. Check out our points calculator here to see if paying mortgage points makes sense for you.
Now, ask yourself these questions:
- How long do I plan on staying in my new home?
- Will purchasing points put me in a financial pinch?
Quick Tip: If you don't stay in your new home long enough to at least break even, you will more than likely not experience any savings.
One of the most important things you can do when buying a new home is to sit down and look at the real numbers. The lowest interest rate doesn’t always get you the best deal. Don’t get too excited about an interest rate before you do the math. It’s important to take the time to talk to an actual human (who is a home loan expert) to make sure you understand the options that benefit you most.
Do you like talking to human beings and having the peace of mind that you’ve been guided by a real expert? So do we. Speak to a human now and find out how you can get a stress-free mortgage by calling (888) 562-6200 or clicking here.