What Are Mortgage Points and Why Are They so Important?
A few weeks ago, I asked what questions you have about buying a home . I’m going to tackle some of them this week.
Here’s one from Lali :
WHAT ARE THE POINTS AND WHY DO I CARE. I literally NEVER heard of this system until a month ago and now they are deciding my ENTIRE WTF FINANCIAL FUTURE.
Indeed, damn it. I don’t have a good answer for you to the question of why people don’t talk about mortgage points, of course, this is not something that I ever remembered, what my parents discussed, and in the list of my friends and my monetary worries, this is never mentioned.
But this is a relatively simple answer: discount points on a mortgage are essentially prepayments of interest on a mortgage, and one point equals one percent of the mortgage amount. In other words, with a $ 200,000 loan, two mortgage points would cost you $ 4,000 at close. In turn, you knock down the interest rate for the entire life of the loan.
That said, the glasses don’t have to be round: according to the Consumer Financial Protection Bureau, you can pay 1.375, 0.5, or 0.125 points. Points are paid at closure and increase your closure costs. (These differ from the points of origin, which are essentially the fees you charge for simply getting a mortgage.)
Here’s an example from PennyMac :
If you have a four percent interest rate on a $ 200,000 mortgage, your monthly mortgage payment will cost approximately $ 955 per month. If you buy one discount point on a mortgage or pay $ 2,000 up front, your interest rate could drop to 3.75 percent, which will lower your monthly payment by about $ 29 per month.
“Points are not always required to get a home loan, but without points the interest rate could be higher,” said Erin Lanz, vice president and general manager of mortgages at Trulia .
Each lender is different, so the number of points you need to lower your rate and how much it will be reduced will depend on the market, the type of loan you are getting, and your lender. Rates change on a daily basis, so there is no guarantee how much your interest will go down, but this is usually around 0.25 percent for one point (note: this does not mean that two points will lower your interest rate by 0.5 percent). Points are listed on your loan estimate and at the end of the disclosure on page 2, Section A, in accordance with the CFPB.
If you don’t plan on staying in your home for long, or are looking to refinance in a few years, then buying points may not make sense – you are putting more money up front to lower your monthly payments. forward. It will take a few years for it to pay off, but it’s worth it for a 15 or 30 year mortgage. In the PennyMac example above, it would take 69 months, or nearly six years, to break even. Make sure you know your break-even point. You can also opt out of buying discounted points if you don’t have a ton of cash to put it off.
One more thing: your points may also be tax deductible when you deduct mortgage interest. But this is a secondary consideration: the real benefit is getting a lower interest rate over the life of your home loan.
If you have your own question or comment on another financial topic, email me at [email protected] or leave a comment below.