When you own a mortgage, one option you often have is to pay off your mortgage using points. A point costs a percentage of your mortgage amount. For each point, you are able to lower your interest rate. Sometimes, purchasing points can be highly beneficial in the long-term as it lowers your interest rate.
Types Of Points
The two types of points you can choose are discount points and origination points. Discount points are prepaid interest on the loan. You are able to pay anywhere from zero to three points. These points are tax deductible.
The other type of point is the origination point. This comes from the origination fee, which covers the cost of making the loan. The origination fee is only tax-deductible if it is used to obtain the mortgage and not if it is used to pay for closing costs. For example, notary fees and inspection fees are not tax deductible.
When Points Are Profitable
Whether you should pay mortgage points is based on how long you will own a mortgage. It is necessary to do the math to determine if paying mortgage points will save you money in the long-term. If you are certain that this will be your forever home, it is likely that you will eventually benefit from paying points. However, it usually takes about seven years to break even and benefit from paying points. Therefore, if you plan to stay at your home for longer than 7 years, you will gradually earn a profit from the decision. If you will be entering into a long-term mortgage, such as one that can last for 30 years, you will definitely benefit from mortgage points.
Accepting A Rate Below The Zero Point Rate
Another option is to accept a rate that is below the zero point rate. You will then either get money back or a credit on your closing costs. This makes it possible for you to not have any closing costs, but you will be paying more on your mortgage each month.
Make Sure To Ask Your Broker
It is important to mention to your broker whether you are interested in points. There are current regulations that make it illegal to offer incentives to brokers for selling points. However, if you have done the math and have found that you will profit from mortgage points, you should definitely consider bringing it up to the real estate broker.