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 home buyer — 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: First off, you don’t pay for points to get a tax break. But prepaid interest (or points) you pay when you get a mortgage may be deducted if you also deduct all the interest on your mortgage too. Click here for more information from the IRS about itemizing interest and points on your 2021 tax return.
A: When you’re looking to see if points make sense for your situation, be sure to look at the entire picture. It's easy to get fooled by super low interest rates only to discover that you're paying more for the low rate by purchasing points. This is a sales tactic used to lure people into rates too good to be true and can cost you money in the short- and long-term.
You need 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. For example, if you pay $7,000 upfront in mortgage points to save nearly $90 a month, it will take you over 6.5 years to recoup the cost of paying points. Is it worth it?
- How long do I plan on staying in my new home?
- Will purchasing points put me in a financial pinch?
The Bottom Line
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 a home loan expert and make sure you understand the options that benefit you most. If you have questions about ridiculously low advertised interest rates due to mortgage points, reach out to us. The goal here is to make sure you don't pay more money than you need to for a home loan.