When it comes to mortgage points, there are two kinds: origination and discount. Origination points relate to the underwriting or administrative fees for loan officers, while discount points function as upfront interest payments. Generally speaking, by purchasing a discount point, the interest rate on your mortgage will decline by 0.25 percent. Typically, one point usually equals 1 percent of the total mortgage amount, so one point for a $100,000 loan would cost $1,000. Keep in mind that interest rates change constantly. Here are three questions to ask yourself before you take advantage of the points:
How long do I plan to live in this house?If you plan on starting a family and moving to a bigger house, save your money. But if you are in it for the long haul — more than five years — it might be in your best interest to buy points. It will probably take a couple of years to earn back the money you paid upfront, but the end result could be a hefty chunk saved in total interest. Figure how long it will take for you to see your savings. There are calculators available on the internet to help you determine how many discount points to purchase based on the length of time you plan to own your home.
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Can I afford it?Look at your financial situation and gauge if you will have enough money to actually pay for the points. After you allocate for closing costs and your down payment, you may not have the funds left over to purchase the points. To help you make a decision, ask that points be quoted as dollar amounts rather than numbers. Discount points are tax deductible, so see if that would work to your advantage. If you are happy with your mortgage interest rate and plan and can afford your monthly payments, you can forgo buying points. If your mortgage payments are absolutely out of your reach, set your sights on a more affordable house.
Have I looked at all of my options?Deciding whether to buy mortgage points is a major decision, and you should look at all of your options before you make a decision. Shop around and calculate the different outcomes. You can use the help of an online mortgage calculator to help you with this and see if purchasing points would add up to savings.
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