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Paying for mortgage points can help reduce your monthly payment, but may not be right for everyone.
To pay or not to pay…points on your mortgage, that is. It’s a question nearly every home buyer faces when figuring out the financing for their new mortgage. Paying points can reduce your monthly mortgage payment, but are only financially beneficial under certain conditions.
What are mortgage points?
Simply put, mortgage points are a form of pre-paid interest where one point equals one percent of the loan amount (as opposed to the purchase price). Often called discount points, borrowers can purchase points to reduce the interest rate on their loan. By paying an up-front fee, you could reduce your mortgage interest rate by approximately .125 percent per point purchased. Typically borrowers can purchase up to three discount points on a single mortgage.
Should you purchase mortgage points?
There are two factors to consider when determining if purchasing points makes sense for you. One is whether or not you can afford to purchase the points. Many borrowers, especially first-time home buyers, can’t after paying the typical 20 percent down payment, closing costs, moving costs and various other costs associated with buying and moving into a new home.
The other factor to consider is how long you plan to stay in the home with your current financing. If you plan to refinanceor sell in the next few years, then you’ll likely end up losing money on the deal. However, if you plan to stay for at least five years or longer then it may make sense to purchase points.
To determine if the points you pay will end up paying for themselves plus some in your monthly savings, there’s a simple calculation you can perform. Divide the cost of the point by the amount you will save each month. This will give you your break-even point, or the number of months you’d need to live in your home to receive back in savings the amount you paid for your mortgage point. If you plan to live in your home beyond that break-even point, the monthly savings you’re getting from your mortgage points start to pay off.
Use this mortgage point calculator to help you decide if paying points is right for you.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
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