As you go through the mortgage loan process, you’ll probably come across the term “mortgage points.” It’s important to fully understand what those two words mean and how they can potentially save you money in the long run.
Taking advantage of points, coupled with buying now while interest rates are still low, can put you in a strong position to obtain the lowest monthly payments possible. Mortgage points don’t lower your loan amount, but they do reduce the amount you pay in interest.
The way it works is that you buy points, which reduces the percentage rate of the interest on your loan. One point will cost you 1 percent of the amount you are borrowing. So, if you buy a $200,000 house, you’ll have to pay $2,000 for a point. The amount your interest rate will be reduced depends on the loan and lender. Generally, a point will reduce your interest rate by about 0.25 percent.
When you are taking out your loan, consider these factors as you decide whether to buy points.
The type of loan you’re taking out
Mortgage points don’t make sense on an adjustable rate mortgage because the rates will be changing after the fixed rate period. However, if you have a fixed rate mortgage, points can permanently reduce the interest rate.
Your break-even point
You’ll want to do a little math and figure out how long it will take you to recover the amount you paid for points. If you plan on being in the house for longer than the recovery time, it makes sense to buy points. If you know your stay in the house is short, it will be more meaningful to use that money somewhere else because, ultimately, you won’t save enough to justify the expense.
The money you spend to buy points could earn you a federal tax deduction if you meet specific criteria. A tax specialist can help you determine what the savings would be.
Private mortgage insurance vs. points
If you make a down payment of 20 percent or more, you don’t have to purchase private mortgage insurance (PMI). You’ll want to crunch the numbers, including how long you plan to live in the house, to determine if you’re better served putting your money toward points or toward a larger down payment to avoid PMI.
The best way to determine whether you should purchase mortgage points is to talk to your lender. They’ll help you factor in all the variables to determine if it’s worth it for you in the long run.
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