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.

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Greg Wilson
Greg Wilsonhttps://senioraffair.com
Our journey started in 2020; our family was tasked to care for an older woman. She had mobility, financial, insurance, and personal and health setbacks. Due to the pandemic, this lasted for a year. We had to help her get around, prepare meals, arrange and help with transportation, and much more! During the process, she became an adored member of our family, the experience open our eyes to the reality that while most prefer to age at home, this comes with many challenges, and if we end up needing a caregiver, this comes with a steep learning curve. So we started keeping a blog about simple discoveries after lots of research of products and services for older people; this is how Senior Affair Magazine was born.

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