Two Kinds of Mortgage Points
There are two main types of mortgage points. In this
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.
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