What are mortgage points and how do they work?

As a savvy homebuyer, you already know the importance of shopping around for the best mortgage rate and negotiating prices. What if we told you there was another step you could possibly take to make your rates even more competitive? Hopefully, your ears have perked up now. Today we will be discussing mortgage points.

Mortgage points are a way to pay extra money upfront during closing to lower your monthly payments and interest rate.

What are mortgage points?

Mortgage points are a way to save on your monthly payments by putting up more money than required towards interest during closing. You pay these fees directly to your lender. This shrinks your monthly payment because your lender receives a lump sum at closing and collects less money every month. Another term for this is “buying down the rate.”

How do mortgage points work, and how much do they cost?

Each mortgage discount point usually costs one percent of your total loan amount, and lowers the interest rate on your monthly payments by 0.25 percent. For example, if your mortgage is $300,000 and your interest rate is 3.5 percent, one point costs $3,000 and lowers your monthly interest to 3.25 percent.

Are mortgage points tax deductible?

According to the IRS, points may be deductible as home mortgage interest. If you’re able to deduct your interest, you may be able to do the same for the points paid on your mortgage.

When to consider mortgage points

• If you’re looking for a way to reduce your mortgage rate.
• If you’re staying in your home long enough to recoup what you put down.
• If you have extra cash available during closing.
• If you’re refinancing and have a large amount of home equity.

When not to consider mortgage points

• If you’re not planning on living in a home long enough for you to break even on your points.
• If you do not have the cash to buy points up front, in addition to other closing costs and your down payment.
• If you plan to refinance early on.

The bottom line

If you can afford to put down more money during closing and intend on staying in your home for a long time, mortgage points could help you save a decent amount of money on interest. Speak with your Home Lending Advisor today to see what option is best for you.