What are Mortgage Points? A quick guide


How do mortgage points work?

Mortgage discount points are all about playing the long game. The longer you plan to own your home, the more points can help you save on interest over the life of your loan.

A discount point will cost you 1% of your home loan amount. So, with a $150,000 loan, a single mortgage point would cost $1,500. Each Cash Back Point you purchase will incur a fixed interest rate deduction. Usually, you can buy points in 0.125% increments. But the amount of your interest rate will be reduced varies depending on the lender.

Above all, adjustable rate mortgage (ARM) buyers have the option of purchasing mortgage points for the fixed rate term of their loan. But since most ARMs begin to adjust after 5-7 years, many ARM homebuyers ignore this option.

Costs and Savings with Mortgage Points

The purpose of buying mortgage points is to save money on mortgage interest payments.

If you are considering an initial purchase of mortgage points, it is important to analyze the numbers to know exactly how long it would take to recoup the cost of purchasing the points. Typically, this is called the break-even point.

You will want to make sure that you plan to own the home to break even. Otherwise, it will not be worth buying mortgage points.

Let’s explore an example of how cash back points work on a $150,000 30-year fixed rate mortgage. You can use a depreciation calculator to make your own comparisons based on different loan amounts and interest rate.








Points

Cost at closing

Interest rate

Monthly payment

Savings on monthly payments

Break-even period

Payment savings on a 30-year loan

0

$0

4.99%

$804.32

N / A

N / A

N / A

1.25

$1,875

4.75%

$782.47

$21.85

7 years, 2 months

$7,866

1.75

$2,625

4.5%

$760.03

$44.29

5 years

$15,944.40

2

$3,000

4.25%

$737.91

$66.41

3 years, 10 months

$23,907.60

As you can see from the table above, even though 1.75 points costs $2,625 initially, you will end up saving $15,944.40 over 30 years due to the lower interest rate. And even if you don’t stay in your home for 30 years, you’ll break even in about 5 years.

In this example, if you plan to live in your home longer than the payback period, mortgage discount points could be an option to save money.

It is important to note that the numbers in the example above are hypothetical. The rate awarded for a certain number of mortgage points purchased varies by lender. In addition, these calculations do not include property taxes and insurance.

Determine your break-even point

To calculate the payback period, divide the cost of the points by the amount you will save on your monthly payment. This will give you the number of months it will take for the savings on monthly payments to equal the initial costs of purchasing points.

Compare your break-even point to your home buying plans. If you intend to live in the home beyond break-even, mortgage points might be an easy decision.

Previous Homes flooded in February hit the market, but real estate agents are not required to notify buyers
Next Estate Appraisals and Administration – Lake County Record-Bee