- What are points when getting a mortgage?
A. Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments. One point costs 1 percent of your mortgage amount (or $1,000 for every $100,000).
It is important to consider how long it takes to recoup the cost of buying points. This is called the break-even period. To calculate it, divide the cost of the points by how much you save on your monthly payment. The resulting number is how long it takes for the monthly payment savings to equal the cost of the points.
If you don’t anticipate being the house very long, it may not make sense to pay down the interest rate. You will want to be sure to exceed the break even point before you sell the home or refinance the mortgage.
Another consideration is how much cash it will take to pay points. Is there enough to cover the down payment, closing cost and lender reserves?
The terms around buying points can vary greatly from lender to lender. Here are some important things to consider:
- The interest rate reduction you receive for buying points is not set and depends on the lender and the marketplace. Shop around.
- Buying points may give you a tax benefit. Check with your tax advisor.
- Points for adjustable-rate mortgages (ARMs) typically provide a discount on the loan’s interest rate only during the initial fixed-rate period. Run the numbers to ensure that your break-even point occurs well before the fixed-rate period expires.
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The Scott Loper Team
Scott & Lisa Loper