When it comes to shopping for mortgages, savvy shoppers know that it’s worth their while to get to the points. After all, the loan’s interest rate is just the beginning. Mortgage points can have a major impact on the total cost of a home loan, so it’s vital that you consider them closely. Why do mortgage points matter? What are origination points? How do discount points impact your loan? Understanding the answers to these questions can help you to make the best choice when selecting a home loan.
What Are Origination Points and Discount Points?
Mortgage points are a type of fee paid to your lender at closing (source). While the specifics can vary from lender to lender, the value of these points is typically set by your loan amount. In most situations, one point is equal to 1 percent of your loan amount. Therefore, 1 point for a $100,000 loan would cost $1,000, but 1 point for a $300,000 loan would cost $3,000. What is the purpose of mortgage points? That depends. There are two types of mortgage points: origination points and discount points.
What You Need to Know About Origination Points
What are origination points? Origination points are basically a mandatory fee charged by a lender to help offset the cost of offering you a loan. The number of origination points that you are required to pay to secure your loan is determined at least in part by your credit history and may differ from one lender to another (source). If your credit is excellent, you may be able to negotiate the number of origination points you’ll need to pay. What if a lender advertises that they don’t charge origination points? It’s unlikely that they are willing to do the work of approving your loan for free, so be aware that lenders who forego origination points often make up the difference with other fees.
What You Need to Know About Discount Points
Discount points offer a way of buying down your mortgage rate to secure a lower interest rate and keep your monthly mortgage payments more affordable (source). Basically, when a borrower opts to purchase one or more discount points, the lender collects a one-time, prepaid fee in exchange for providing a lower interest rate over the life of the loan. Generally, one discount point lowers a quoted interest rate for a fixed-rate mortgage by 0.25 percent. Purchasing multiple discount points allows you to achieve increasingly lower interest rates. However, it’s important that you look closely at what you are being offered for each discount point when shopping for a loan since this can vary widely from one lender to the next.
Are Mortgage Points a Smart Investment?
Should you pay for mortgage points? While origination points may be somewhat negotiable, they are generally a required cost. However, the decision to purchase discount points is in the hands of the borrower. How do you know if discount points are a smart investment? According to Investopedia, there are a few things borrowers should consider when deciding whether or not to take the plunge with discount points:
- Time: How long do you plan to own the property? Generally speaking, the longer you plan to stay in a home, the greater the financial benefit that you’ll enjoy from a lower interest rate, so the more you’re likely to save by purchasing discount points.
- Money: Can you afford to pay for discount points? Discount points may save you money over the long term, but they have to be paid for upfront.
- Peace of Mind: How confident are you in your ability to make your monthly mortgage payments? Some experts argue that discount points aren’t worth it because other investments have the potential to bring greater returns. However, others point out that the peace of mind the average homeowner receives from having a lower monthly payment that fits more comfortably within their means should not be overlooked.
Mortgage Points and Taxes
Proponents of homeownership often tout the tax benefits, so it’s worth investigating how mortgage points might impact your tax bill. Moving.com reports that origination points are generally not tax deductible. However, discount points might be. Because the IRS considers them a form of prepaid mortgage interest, homeowners who meet certain qualifications may be able to lower their tax bill by deducting the cost of their discount points from their taxes. If this interests you, discuss your specific situation with a knowledgeable tax professional.
There is a lot to think about when you begin hunting for a home. If you have questions about the process of buying a home or securing a mortgage, you can count on the professionals at PrimeLending of Springfield, Missouri, for the accurate, insightful answers that you need to make informed decisions. With our expertise and commitment to clear and timely communication, we can guide you through the process from application to closing. To learn more, please call 417-616-0777 or contact us online.