Pros and Cons on Paying Mortgage Points

Many potential homebuyers are concerned in 2024 about interest rates and paying mortgage points. With 30-year mortgage rates well over 6%, buying and affording a home is more challenging than in the recent past. That is one reason that many people are thinking about paying mortgage points on a mortgage, which is one way to lower your rate.

If you are looking at mortgages and possibly buying mortgage points, Refiguide.org has all the answers for you. We can help you find the ideal mortgage and rate for your needs and budget.

What Are Mortgage Points?

Mortgage points, also known as discount points, are fees that a homebuyer can pay upfront to lower the interest rate on the loan.

This process is sometimes called buying discount mortgage points, buying mortgage points, or a mortgage rate buydown.

Many lenders will allow a homebuyer to buy anything from a fraction of a point to as much as three points.

With most lenders, a mortgage point costs 1% of the loan balance and will permanently lower your rate by approximately .25%.

For instance, if you get a $200,000 mortgage from Refiguide.org, a point would cost $2,000, which would give you a .25% discount on the rate. Two points would cost you $4,000 and would lower the rate by.5%. However, the cost and value of a mortgage point varies, so you need to discuss it directly with the lender.

Many mortgage lenders offer FHA, VA, 30-year fixed, and even jumbo loans with two or more mortgage point discounts available. However, you may need to put more money down and have excellent credit to get into this program. Our loan advisors can run your credit and analyze your finances to determine if you qualify for buying more than two points.

You can usually buy mortgage points by paying for them upfront or rolling them into the cost of the mortgage. If you choose the latter, you should run the numbers carefully. Adding to the mortgage could negate what you are saving in mortgage interest. It’s often best to pay for the mortgage points out of pocket if it won’t leave you short of cash in your new home.

How Much Will You Save With Mortgage Points?

How much you will save with tax deductible mortgage points depends on how large the loan is, how many discount mortgage points you guy, how long the loan is, and how much of a rate deduction you get with each point.

Without buying mortgage points, a $200,000 home loan at 4.5% and a 30-year term gives you a $1,013 monthly payment. If you bought one mortgage point for $2,000, you would have a 4.25% rate and the payment would be $984. Over the life of your mortgage, you would have about $10,600 in interest savings, or about $8600 after you account for the $2,000 you spent on the point.

On the other hand, if you bought two mortgage discount points for $4,000, you would have double the interest savings. The rate would go down to 4% and your payment would be only $954. Over three decades, the savings would be $21,000 on interest, or $17,000 after you take off the $4,000 the points cost you.

Should You Buy Mortgage Points?

Buying tax deductible mortgage discount points can save you money in the long run. The points are usually tax deductible, so you would need to itemize your deductions. The standard deduction was increased during the Trump presidency, however, and fewer Americans are itemizing their deductions these days. That said, the tax policy has to be renewed next year.

Generally, buying mortgage points makes sense if you want to stay in the home for the long term. Or, you should stay in the house at least long enough to break even on what the points cost you.

For instance, if you bought two mortgage points on your $200,000 mortgage and have a 4.5% rate and a 30-year note, you would save interest of $21,000. However, it will take more than five years to break even on what you spent on the points – $4,000.

You should run the numbers on a mortgage calculator to figure out how long it will take you to break even on the mortgage points you buy. However, mortgage experts note that if you sell the home within five years, you probably will not break even on buying mortgage discount points.

Buying mortgage points also may not be logical if you want to refinance the mortgage after one or two years; your rate is going to decrease anyway. If you have an adjustable rate home loan, the points are only useful during your fixed-rate term.

Mortgage Discount Points vs Mortgage Origination Points

It’s important to not confuse mortgage discount points and mortgage origination points. Mortgage discount points let you reduce the interest rate on your home loan and lower your monthly payment. As said above, mortgage points can be bought for 1% of the value of the loan per point.

However, your lender will charge you mortgage origination points to cover what it costs to create the loan. The amount you are charged will vary by lender. However, the standard loan origination fee is 1.5% of the loan value. Your mortgage origination points will be stated in the closing document. You will always know what you are being charged when you close the loan. Depending on your FICO score and down payment, some loan providers may negotiate on your mortgage origination points.

Can Mortgage Discount Points Be Negotiated?

Yes. The lender could add mortgage discount points to the loan to make the rate lower. They may not even ask if you want discount points. This is why when shopping for a loan you should always ask for a mortgage offer with zero points. This way, you can compare each loan fairly. You can always choose to buy mortgage points after you select your lender.

However, once the loan is closed, you cannot buy points. If you want to purchase mortgage discount points, it must be done before the loan is completed.

In a buyer’s market, it is possible that a seller could offer to pay for your mortgage discount points. In this situation, you would save money from the start of the loan. There is no need to determine what the break-even point is.

Some Mortgage Lenders Offer Negative Mortgage Points

There are even lenders who offer negative mortgage points. This is less common, but it means increasing your rate so you can get a credit for closing costs.

Suppose you want a $250,000 mortgage, but you apply a negative mortgage point. The rate could go from 6.5% to 6.75%, but you would receive $2,500 towards closing costs. Negative mortgage points can make the loan cost more over the years. But it can help you close on a home that would be hard without assistance. You also might want to pay for a negative point to reduce closing costs if you think you will sell the home in a few years. The higher mortgage rate wouldn’t cost you that much in added interest if you sell in three or five years.

Takeaway on Paying Mortgage Points

Buying mortgage points can be a good choice to reduce your interest rate and save money over the long term. It can be particularly beneficial to purchase mortgage discount points if you plan to stay in the home for many years. The lower interest charges on your home loan will add up considerably over time.

On the other hand, if you want to sell your home within less than five years, you may want to reconsider buying mortgage points. The saved interest will not be more than what the points cost you. But you could consider buying a negative point if you want a closing cost credit. Doing this could help you save money if you plan to sell the home within a few years.

You can ask your loan advisor at Refiguide.org to show you different mortgage scenarios where you buy and don’t buy mortgage points. Our goal at Refiguide.org is to help you get into the perfect, most affordable home loan for your situation. But what works well for one buyer may not work for another. Our team will understand what your buying and homeowning goals are for the short and long term, then recommend if buying mortgage points is a wise option for your needs.

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