CTips1_MortgagePoints

Mortgage points are fees you pay upfront to lower your interest rate on a home loan. They can be called discount points and typically cost 1% of the loan amount. Origination points are fees paid to cover processing and reviewing the loan application. Origination points are not optional. Each discount point purchased reduces the interest rate by a set percentage, usually a quarter. Points are paid at closing and can be added to other closing costs. Buying points can save you money over the life of the loan. Adjustable rate mortgages also offer the option to buy points. Points can increase closing costs but may be worth it if you stay in the home long enough to see savings. They can lower your monthly payment and may be tax deductible. Hello, everyone, this is Chad Wisnett with Midtown Mortgage, and today we're going to talk about mortgage points. Mortgage points allow you to lock in a lower interest rate during the home loan process and pay less on your loan over time. Chad, what's a mortgage point? Well, a mortgage point, sometimes it's also called a discount point, is a one-time fee you pay to lower the interest rate on your home loan purchase or refinance. One discount point typically costs 1% of your total home loan amount. So, for example, if you take a mortgage for $100,000, one point would cost you $1,000. When you purchase a point, you repay the interest for a smaller mortgage payment. So, you may have heard the term mortgage origination points before. Mortgage origination points refers to the origination fees that you pay your lender to cover the cost of processing and reviewing your mortgage loan application. And depending on your credit score and the size of your down payment, sometimes you can negotiate these fees with your loan officer. And unlike discount points, mortgage origination points don't lower your interest rate. And origination points aren't optional. You must pay this one-time upfront fee at closing. So, going back to how do mortgage points work. Each discount point you buy reduces your interest rate by a set percentage point. The discount varies by lender, but you generally can expect a quarter interest rate reduction for each point purchased, though most mortgage lenders cap the number of points you can buy. And you can also purchase points in increments of eighths of a percent or 0.125%. Points are paid at closing, and your lender will calculate the cost of any points you purchased and add them to your other closing costs. So, let's run through this example. Let's say you take out a 30-year fixed rate mortgage for $200,000 with a 5.125% interest rate. Your lender offers you an interest rate of 4.75% if you purchase 1.75 mortgage points. On a $200,000 loan, each point will cost $2,000. For your loan, 1.75 points would cost $3,500. If you don't buy the mortgage points, your interest rate would stay at 5.125%. So, over 30 years, if you don't pay down the loan early, the cost of the loan with interest is $391,809. If you buy the 1.75 points, you will pay $375,000 over the life of the loan. So, with mortgage points, you'd save about $16,000 over your 30-year mortgage. Discount points work similarly for adjustable rate mortgages as they do with fixed rate loans. The only difference is that the interest on your arm will adjust after five or seven years, making it crucial to know how long it will take to make buying points on a mortgage worth the investment. So, here are some of the benefits of mortgage points. Borrowers buy points to lower their interest rate, but there are some other advantages to consider. Points can increase your closing cost by thousands of dollars, and it can be a high upfront cost that may be worth it if you stay in the home long enough to see savings from the reduced interest rate. Paying extra money upfront can mean tens of thousands of dollars in savings over your mortgage. Yes, it may allow you to lock in a lower monthly payment. Mortgage points can lower your monthly payment by decreasing your interest rate, which means you pay less in interest each month. The less interest you pay, the smaller your monthly mortgage will be. You may also save on taxes. You may be able to deduct the cost of the points from your taxes because mortgage interest is tax deductible, and discount points are considered prepaid mortgage interest. To understand the deductions you may be eligible for, be sure and check out the IRS rules on mortgage point benefits and speak with a qualified tax expert. That's all for today. Look forward to talking with you again.