What Are Mortgage Points and How Do They Work? 3 Facts.

Two Kinds of Mortgage Points

There are two main types of mortgage points. In this Senior Affair article, we answer what mortgage points are and how it works. Before we get into it, let’s remove the concern about origination points from the conversation; they aren’t the object of this discussion. Origination points are the fees the loan officer earns, usually around 1% of the mortgage value, which you can negotiate lower. The second type of mortgage point is more of a mystery. A discount point is a way to reduce the interest you will pay on your mortgage; it can also be called prepaid interest.

How Much is One Point on a Mortgage?

Is it a way to reduce interest? Some believe it is just a rip-off. A discount point is equal to 1% of the mortgage value, so for a $200,000 mortgage, the discount point would be equivalent to $2000. You can lower the mortgage interest rate by almost a quarter when purchasing a discount point. For instance, if your lender gives you an interest rate of 4.5%, then by buying a discount point for $2000, you can get the interest rate lowered to 4.25%. Most lenders allow borrowers to purchase up to 3 discount points. If each discount point reduces 0.25%, you can reduce up to 0.75% of your interest rate.

What is a Good Number of Points to Pay on a Mortgage?

Are discount points worth it? The answer to this question depends on the term of your mortgage, your savings, and whether you have enough savings to buy the discount points in the first place. For example, for a $200,000 mortgage, payable over 30 years at 4.5%, you will have to make monthly payments of up to $1296 per month, whereas purchasing three discount points for $6000 will reduce your interest rate to 3.75%. Your monthly payments will become $1210, thus saving you $86 per month. At this rate, it will take you approx 70 months (6000/86) or almost 5.8 years to break even. Is it worth it then? Yes, if you intend to live more than 5.8 years, discount points may not be a good option if you want to move out and refinance.

If you want to speak to someone about your situation, complete this form.

100% online application speeds up the entire process so you can receive your funds quickly, with no hassle. Get a potentially lower rate, with the option to get cash out so you can use the money when you need it most, all at a potentially lower rate.

If it’s not a personal residence, but instead a vacation home or investment home that you are trying to get a long quote for, you can apply here to get excellent rates for 30 years fixed.

Frequently Asked Questions

More From this Author

Related Articles

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Stay Connected

1,291FansLike
4,954FollowersFollow
724FollowersFollow
196FollowersFollow
254SubscribersSubscribe

Latest Articles

spot_img