When you purchase mortgage discount points from a lender, you basically pay some interest upfront to lower the interest rate over the life of your loan. Mortgage points are included in the closing costs. Here are some benefits of purchasing them.
Table of Contents
Save money over the life of the loan
When considering whether mortgage discount points are worthwhile, you need to think about the length of time you plan to live in the house. Generally, the longer you plan to stay in it, the more savings your mortgage discount points will get you. Purchasing points can be a good move if you plan to stay in the house for the long term. You have to keep a mortgage for long enough to make the cost of buying points worthwhile.
Landlords who purchase investment properties may hold on to them for long periods and rent them out to prospective tenants. In this case, mortgage discount points could make a difference. Evernest, APM and Mynd property management in Denver have property managers with plenty of expertise to help homeowners find the right tenants, collect rent and do maintenance. They help to ensure that occupancy rates remain high and cash flow stays consistent.
Help you qualify for a home
Mortgage discount points can also increase the chances of you qualifying for a house of your choice. Paying points upfront lowers your interest rates and this, in turn, lowers your monthly mortgage payments. The amount of savings can double over a 30-year period if you purchase two mortgage points instead of one. You can also deduct mortgage interest payments from your taxes so they can potentially offer you tax benefits.
Is an adjustable-rate mortgage a good idea?
An adjustable-rate mortgage starts with a low fixed interest rate for three, five, seven years and ten years. After this, periodic rate adjustments take place, and payments will decrease or increase as interest rates change. It’s different from a fixed-rate mortgage, where the interest rates stay the same over the life of the loan.
In certain cases, choosing an adjustable-rate mortgage is a good financial decision and can potentially save you money. It may be a good option if you know you will only have the loan for a few years. You can enjoy the fixed rate and sell before it ends. A disadvantage is that you may be unable to make payments after the fixed-rate period ends and lose the house.
Mortgage discount points for adjustable-rate mortgages work the same as with fixed-rate ones. The only difference is that the loan adjusts after a fixed-rate period. It is crucial to know how long you need to make buying points a worthwhile investment.
Are mortgage discount points the same as mortgage origination points?
No, the two are not the same. Origination points pay the lender for the creation of the loan. Mortgage discount points buy down the interest rates of the mortgage. Not all mortgage providers require payment of origination points, and when they do, they are often willing to negotiate the fee.
How much do mortgage discount points cost?
Every point you buy costs one percent of your total loan amount. For example, on a $10,000 mortgage, one point is equal to $1,000. The purchase of each point will generally lower the interest on your mortgage by about 0.25%. You may be able to buy a fraction of a point from lenders up to three mortgage discount points. Most mortgage lenders will cap the number of points you can buy.
There are various calculators online that can help you to determine how many discount points to purchase depending on the length of time you plan to own the house.
Another factor to consider is whether you have enough money to pay for mortgage discount points. Many people can barely afford down payments and closing costs without adding mortgage discount points too. On top of a down payment of $100,000 on a $500,000 house, another $15,000 for three mortgage discount points on top of that could be more than many homeowners can afford.
The larger your mortgage, the more you have to pay to buy mortgage discount points. They may save you over the life of the loan but only if you can buy them without lowering your down payment and having to get private mortgage insurance.
Conclusion
Mortgage discount points are all about playing a long game. Buying them may be worthwhile or not, depending on your financial situation and how long you plan to stay in a house. The pros are that you pay less interest over time and your monthly payments are lower. The cons are that you have to put more money into the transaction upfront. If you don’t stay in the home for a certain length of time, the cost is more than the benefit you receive.
About Carson Derrow
