What are Points and Should I Buy Them?
Whether you are currently shopping around for a mortgage or you’re gathering information in order to be in the best position to shop for and apply for a mortgage in the coming year, you’ve probably heard about mortgage points. While points are fairly common in the mortgage industry, to an outsider they can be confusing and intimidating to understand so we’ve collected some great basic information about mortgage points: what they are, how they work, and what you’ll need to know about them in order to determine if purchasing points is something you will be interested in doing when you are ready to purchase a home.
What are points and how do they work?
A point is a fee you can pay, which is equal to 1% of the mortgage loan amount. So if you have a loan for $200,000, each point would cost you $2,000. There are two types of points available: discount points and origination points.
Discount points purchased will prepay interest due on your mortgage loan. You can purchase points in order to lower the interest rate on your mortgage. Lenders will generally allow borrowers to purchase between no points and as many as 3 or 4 points. Discount points are tax deductible.
Origination points (or origination fees) are charged by your lender in order to help cover the cost of extending a mortgage loan to you. Origination fees are tax deductible only if they were paid to obtain a mortgage but not to pay other required closing costs.
Should I buy points on my mortgage?
Whether or not you should purchase points when you get your mortgage depends on a number of factors, including your mortgage loan interest rate, the rules of your lender regarding points, how much money you have on-hand and available after setting aside money for your down payment, closing costs and any other expenses you’ll have associated with your mortgage and how long you plan to stay in your home. If you don’t plan to stay in your home long, then purchasing points may not make a lot of sense because you won’t be in your home long enough to recoup the cost of your points. If your home is expected to be a long-term purchase, then reducing your interest rate as much as you can probably makes financial sense.
Your mortgage loan professional will be able to break down your specific numbers for you and let you know whether buying points is an option, and if that option is available, whether it makes sense for your individual mortgage loan.