Mortgage points are also called as discount points. These points are the fees that are paid directly to loan lender at the time of closing in exchange. Basic reason for which it is done is to get a reduced interest rate. With the help of mortgage points, your monthly payments towards mortgage will become less. There are a few things that you need to consider when going for mortgage points.
About Mortgage Points and their significance
Mortgage discount points are a pre-payment on mortgage interest.1 mortgage point is equivalent to 1 percent of your total mortgage amount. Use of mortgage point implies that you pay some interest amount upfront to get a lower rate of interest throughout your loan tenure. Mortgage points are useful as it gets you a loan at a lower interest rate.
Important things to know in relation to mortgage points
The terms and conditions around buying mortgage points vary significantly from one lender to another. Here are a few important things that you need to consider before choosing mortgage points:
- The reduction in interest rate you receive for purchasing these points is not fixed and largely based on the marketplace as well as the lender.
- Buying mortgage points gives a tax benefit.
- Mortgage points provide a reduction/discount on the interest rate of the loan only during the beginning fixed interest rate period
- Ensure that you are aware of the breakeven point. You may even give up purchasing these discount points when you do not have surplus money to make an upfront payment.
- Each and every lender is different. So, the points needed to reduce the interest rate, and the extents to which it will get reduced depend on the loan type, the prevailing market conditions and your lender as well. Rates change on a daily basis, so there is no assurance of how much interest amount will get reduced. Normally, it is close to 0.25 percent for a single point
- Mortgage points do not require to be whole numbers. As per the Consumer Financial Protection Bureau, you can even pay in the form of decimals such as 1.345 points, 0.3 points or 0.458 points. These points are paid at the time of closing and increasing the closing costs.
How useful are mortgage points?
To figure out whether mortgage points would benefit you, it is important to determine whether or not you will able to arrange the cash needed to buy points up front. Also, keep in mind that you need cash to make the down payment also. You must pay attention to the length of time for which you wish to own the house. Buying these points to reduce your interest rate can make sense only if you choose a fixed interest rate mortgage and plan to own the home once it reaches the break-even period.
Conclusion Buying mortgage points calculator is beneficial for several purposes by reducing the interest rate. In this way, it can help in saving a lot of significant money over the entire loan tenure. Before you buy these points, it is very essential to understand their working and the amount of time it takes for an additional upfront cost to be valuable.