What are mortgage points ⁠— and how do they work?

What Are Mortgage Points, And Should You Pay Them?

What are mortgage points ⁠— and how do they work?

Buying a house is the most expensive purchase most of us will ever make, so naturally, anything that can reduce the cost of a mortgage is worth looking at.

Besides negotiating a good price and shopping for the best mortgage rates, some savvy homebuyers buy mortgage points, also called “discount points,” to lower the amount of interest they pay.

What are mortgage points?

Mortgage points are fees a buyer pays a mortgage lender to trim the interest rate on the loan. This is sometimes called “buying down the rate.” Each point the borrower buys costs 1 percent of the mortgage amount. So, one point on a $300,000 mortgage would cost $3,000.

Each point typically lowers the rate by 0.25 percent, so one point would lower a mortgage rate of 4 percent to 3.75 percent for the life of the loan.

Homebuyers can buy more than one point, and even fractions of a point. A half-point on a $300,000 mortgage, for example, would cost $1,500 and lower the mortgage rate by about 0.125 percent.

How much each point lowers the rate varies among lenders. The rate-reducing power of mortgage points also depends on the type of mortgage loan and the overall interest rate environment.

Points are paid at closing and are listed on the Loan Estimate document, which borrowers receive after they apply for a mortgage, and the Closing Disclosure, which borrowers receive before the closing of the loan.

Mortgage discount points vs. APR

While buying discount points on your mortgage is effectively prepaying interest, an annual percentage rate (APR) is a way to facilitate the comparison of loans among different rate and point combinations.

It incorporates not just the interest rate but also the points you pay and then any fees that the lender charges for providing the credit. For more information check out a quick explanation below from Greg McBride.

Example of how mortgage points can cut interest costs

If you can afford to buy discount points on top of the down payment and closing costs, you will lower your monthly mortgage payments and could save gobs of money.

The key is staying in the home long enough to recoup the prepaid interest. If a buyer sells the home after only a few years, refinances the mortgage or pays it off, buying discount points could be a money-loser.

Here is an example of how discount points can reduce costs on a 30-year, fixed-rate mortgage in the amount of $200,000.

Loan principal$200,000$200,000
Interest rate4%3.5%
Discount pointsNone$4,000
Monthly payment$954$898
Interest total$144,016$123,336
Lifetime savingsNone$20,680

In this example, the borrower bought two discount points, with each costing 1 percent of the loan principal, or $2,000. By buying two points for $4,000 upfront, the borrower’s interest rate shrank to 3.5 percent, lowering their monthly payment by $56, and saving them $20,680 in interest over the life of the loan.

To calculate the “break-even point” at which this borrower will recover what was spent on prepaid interest, divide the cost of the mortgage points by the amount the reduced rate saves each month:

$4,000 / $56 = 71 months

This shows that the borrower would have to stay in the home 71 months, or almost six years, to recover the cost of the discount points.

“The added cost of mortgage points to lower your interest rate makes sense if you plan to keep the home for a long period of time,” says Jackie Boies, a senior director of housing and bankruptcy services for Money Management International, a nonprofit debt counseling organization based in Sugar Land, Texas. “If not, the lihood of recouping this cost is slim.”

You can use Bankrate’s mortgage points calculator and amortization calculator to figure out whether buying mortgage points will save you money.

What are mortgage origination points?

There is another type of mortgage points called “origination” points. Origination points are fees paid to lenders to originate, review and process the loan. Origination points typically cost 1 percent of the total mortgage. So, if a lender charges 1.5 origination points on a $250,000 mortgage, the borrower must pay $4,125.

Sometimes, origination points can be negotiated. Homebuyers who put 20 percent down and have strong credit have the most negotiating power, says Boies.

“A terrific credit score and excellent income will put you in the best position,” Boies says, noting that lenders can reduce origination points to entice the most qualified borrowers.

Mortgage points and ARM loans

Mortgage points on an adjustable-rate mortgage (ARM) work points for a fixed-rate mortgage, but most ARMs adjust at five years or seven years, so it’s even more important to know the break-even point before buying discount points.

“Factor in the lihood that you’ll eventually refinance that adjustable rate because you may not have the loan long enough to benefit from the lower rate you secured by paying points,” says Greg McBride, CFA, chief financial analyst for Bankrate.

Are mortgage points tax-deductible?

Mortgage discount points, which are prepaid interest, are tax-deductible on up to $750,000 of mortgage debt. Taxpayers who claim a deduction for mortgage interest and discount points must list the deduction on Schedule A of Form 1040.

“That generally isn’t a problem for homebuyers, as interest on your mortgage often is enough to make it more beneficial to itemize your deductions rather than taking the standard deduction,” says Boies.

However, unless you can meet a host of IRS requirements, you cannot take  a deduction for all of the points you paid in the same tax year. Each year, you can deduct only the amount of interest that applies as mortgage interest for that year. Points are deducted over the life of the loan rather than all in one year.

Origination points, on the other hand, are not tax-deductible.

“Points that are not interest but are charges for services such as preparing the mortgage, your appraisal fee or notary fees can’t be deducted,” says Boies.

Consult a tax professional if you are not sure about what homebuying expenses are tax-deductible.

Bottom line

Buying mortgage points can be a big money-saver if you can afford it and you plan to stay in the home long enough to reap the interest savings.

For many homeowners, however, paying for discount points on top of the other costs of buying a home is too big of a financial stretch. In addition, buying points is not always the best strategy for lowering interest costs.

“It may make financial sense to apply these funds to a larger down payment,” says Boies.

A bigger down payment can get you a better interest rate because it lowers your loan-to-value ratio, or LTV, which is the size of your mortgage compared with the value of the home.

Overall, homebuyers should consider all the factors that could determine how long they plan to stay in the home, such as the size and location of the house and their job situation, then figure out how long it would take them to break even before buying mortgage points.

Learn more:

Источник: https://www.bankrate.com/mortgages/mortgage-points/

What Are Mortgage Points and How Do They Work?

What are mortgage points ⁠— and how do they work?

Mortgage points are kind of free throws in a basketball game. And points are how you win the game, so you want as many as you can get, right? Turns out, these points come at a cost. And it’s not always worth it.

Mortgage points can be super confusing, which makes it really hard to know whether or not they’re a smart choice for you. Are they really a money-saving deal?

Since buying a home is one of the most expensive purchases you might ever make, we’ve found out everything you ever wanted to know about mortgage points. (Lucky for you, we’ve narrowed it down to what’s actually important.)

Types of Mortgage Points

So what types of points are we playing for here? Just with basketball (stick with us here), there are different types of mortgage points: origination points and discount points.

Let’s get origination points the way (because, honestly, that’s not really what this article is about). This type of mortgage point is basically a fee that doesn’t lower your interest rate. It just pays your loan originator. Trust us, you’re better off paying out-of-pocket for their service. Skip origination points.

Dave Ramsey recommends one mortgage company. This one!

Next up (and for the rest of this article), let’s talk discount points. Lenders offer mortgage discount points as a way to lower your interest rate when you take out a mortgage loan. The price you pay for points directly impacts the total interest of the loan. And the more points you pay, the lower the interest rate goes.

That might sound all sunshine and roses at first, but get this—it’s going down because you’re prepaying the interest. In reality, you’re just paying part of it at the beginning instead of paying it over the life of the loan.

How Do Mortgage Points Work?

After you apply for a mortgage, your lender will offer discount points as a way to lower your overall interest rate. Your point options will be on official home transaction documents the Loan Estimate and Closing Disclosure. Most lenders allow you to purchase between one to three discount points.

To buy mortgage points, you pay your lender a one-time fee as part of your closing costs.

How Much Does One Point Lower Your Interest Rate?

One discount point usually equals 1% of your total loan amount and lowers the interest rate of your mortgage around one-eighth to one-quarter of a percent. But heads up: the actual percentage change will depend on your mortgage lender.

Is your head spinning yet? Well hang on, we’re about to do some math.

To help this all make sense, let’s break it down. Suppose you’re buying a $300,000 house. You have a 20% down payment and are taking out a 30-year fixed-rate conventional loan of $240,000 at a 4.5% interest rate.

To lower the interest rate, you pay your lender for one mortgage point at closing, and assuming that point equals 1% of your loan amount, it will cost $2,400.

$240,000 loan amount x 1% = $2,400 mortgage point payment

After you buy the mortgage point, your lender reduces the interest rate of your mortgage by, say, a quarter of a percent. That takes your interest rate from 4.5% to 4.25%.

This slightly lowers your monthly payment from $1,562 to $1,526—which is $36 less a month on a fixed-rate conventional mortgage.

You can use our mortgage calculator to figure the difference between the interest amount with the original rate (4.5%) and the interest amount with the reduced rate (4.25%) over the full lifespan of the loan.

Are you still with us? Okay, good.

Without any mortgage points, you’ll pay a total of $197,778 in interest. With one mortgage point, you’ll drop that amount to $185,035—which saves you $12,743 in total interest.

$197,778 original total interest paid – $185,035 reduced total interest paid = $12,743 amount saved

But when you account for the $2,400 you paid for the mortgage point, you really only saved $10,343.

$12,743 interest savings – $2,400 mortgage point = $10,343 true savings

Okay, we know we just threw a lot of numbers at you hard and fast. Just know this process is known as “buying down the rate.” But remember, you’re really just prepaying interest here. The more points you buy, the more interest you prepay—which is why your lender would be willing to lower the interest rate on your loan (they’re not Santa Claus after all).

Take a look at the chart below to see how this example plays out with two mortgage points.

30-year loan amount: $240,000No Points1 Mortgage Point2 Mortgage Points
Cost of Point(s)N/A$2,400$4,800
Interest Rate4.5%4.25%4%
Monthly Payment$1,562$1,526$1,491
Monthly SavingsN/A$36$71
Total Interest Paid$197,778$185,984$172,486

Should You Pay for Mortgage Points?

It seems odd to say, but buying mortgage points to lower your interest rate could actually be a complete rip off. Say what? How can a lower interest rate be a bad deal?

For starters, it could be years before you really save any money on interest because of your mortgage points. To see what this would look , you’d first need to calculate what’s known as your break-even point.

What Is the Break-Even Point on a Mortgage?

The break-even point is when the interest you saved is equal to the amount you paid for mortgage points. They sort of cancel each other out.

Alright, it’s time to go back to math class again. Let’s calculate the break-even point from our example we used before. To do this, just divide the cost of the mortgage point ($2,400) by the amount you’d be saving per month ($36). And there you have it, that answer is the break-even point.

$2,400 / $36 = 67 months (5 years and 7 months)

In other words, in 67 months, you’d have saved over $2,400 in interest—the same amount you paid for the mortgage point. After reaching the break-even point, you’ll pocket that $36 each month, which will be the money you save on interest because of the mortgage point you bought.

Are Mortgage Points Worth It?

Here’s the thing: Mortgage points could be worth it if you actually reach your break-even point—but that doesn’t always happen.

According to the National Association of Realtors’ 2018 report, the median number of years a seller remained in their home was 10, the same as last year. From 1985 to 2008, NAR reports the tenure in a home was six years or less.(1)

While 10 years is enough time to break-even in our example, most buyers won’t regain their money on mortgage points because they usually refinance, pay off, or sell their homes before they reach their break-even point.

While 10 years is enough time to break-even in our example, most buyers won’t regain their money on mortgage points because they usually refinance, pay off, or sell their homes before they reach their break-even point.

So what’s an eager homebuyer to do? Instead of buying mortgage points, put that extra money toward your down payment and reduce your loan amount altogether! Ding, ding!

An even better way to lower your interest rate without taking the risk of mortgage points at all is to shorten the length of your loan from a 30-year fixed-rate conventional loan to a 15-year one, which is the type we recommend.

If your estimated interest rate still looks way too high, get a real estate agent who can help you find a house that’s actually within your budget.

Beware of Adjustable-Rate Mortgage Points

If you’re thinking about getting an adjustable rate mortgage (ARM) loan, don’t do it! ARM loans are one of the top mortgages to avoid because they allow lenders to adjust the rate at any time. This just transfers the risk of rising interest rates (and monthly payments) to you—yeah, count us out. Seriously, these things are terrible.

Oh, and that’s not all. If you buy mortgage points on an ARM loan, lenders might only provide a discount on the interest rate during the initial fixed-rate period.

Once the fixed-rate period is over, you lose your discount, which could happen before you even reach the break-even period. How convenient! That’s a win for the bank—not for you.

Do Mortgage Points Affect Taxes?

Mortgage points may be tax deductible as home mortgage interest—but that still doesn’t make them worth buying. In order to qualify, the loan must meet a slew of qualifications on a lengthy list of bullet points, all of which are determined by the IRS.(2) 

If you’ve already bought mortgage points, check with a tax advisor to make sure you qualify to receive those tax benefits.

Get a Smart Mortgage

Let’s be real: Your house may be the biggest purchase you’ll ever make. Take the time to get this right! To find a good lender who can help you feel confident about your mortgage, contact our friends at Churchill Mortgage. They’ve helped thousands of people you understand and finance their home the smart way.

Источник: https://www.daveramsey.com/blog/what-are-mortgage-points

How Do Mortgage Discount Points Work?

What are mortgage points ⁠— and how do they work?

Mortgage points or “discountpoints” allow you to pay more in closing costs in exchange for a lower mortgagerate. Thismeans you’d have a bigger upfront fee but alower monthly payment over the life of your loan.

Typically, the cost of one mortgage point equals 1% ofthe loan amount, and this single point lowers your interest rate by about0.25%.

For example, if your loan amount is $300,000and you’reoffered a 3% mortgage rate, you might buy onediscount point for $3,000 to get a 2.75% interest rateinstead.

If you plan to keep the loan long-term, mortgage points are a great way to save money over the life of your loan.

Check your mortgage rates (Mar 25th, 2021)

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How mortgage points work

When you check currentmortgage rates from lenders, you’ll often see three different numbers listed:interest rate, APR, and ‘points.’

Points — also called ‘mortgage points’ or ‘discount points’ — are fees specifically used to buy-down your rate.

Each discount point costs 1% of your loan size and typically lowers your mortgage rate by about 0.25%.

This means when you’re looking at a rate quote that includes points,you’d have to pay extra upfront to actually get the rate shown.

For example, imagine you’retaking out a $300,000 mortgage loan. Here’s how your interest rate mightlook with and without mortgage points:

Mortgage PointsUpfront Cost To Buy PointsInterest RateTotal Interest Paid Over 30 Years
0$03.50%$185,000
0.5$1,5003.375%$177,500
1$3,0003.25%$170,000
2$6,0003.0%$155,300

Interest rates shown are for sample purposes only. Your own mortgage rate and fees will vary. Get a custom rate estimate here.

The cost of buying discountpoints adds up quickly. But as you can see in the example above, the long-termsavings can be substantial.

However, if you only plan to stayin the home a few years, the upfront cost of buying mortgage points couldeasily outweigh the savings you’d actually ‘make’ by buying down your rate. Somake sure you consider the amount of time you plan to keep your loan beforedeciding whether or not to pay for discount points. 

On a settlementstatement, discount points are sometimes labeled “Discount Fee” or “MortgageRate Buydown.”They are different from “origination points” whichare fees a bank charges to set up your loan.

Check your mortgage rates (Mar 25th, 2021)

How discountpoints affect your mortgage rate

When discount points are paid, thebank collects a one-time fee at closing in exchange for alower interestrate for the life of the loan.

However, the size of your interest rate reduction will varyby bank.

This is one of the reasons whyit’s important to shop for your best mortgage rate. Different banks will offerdifferent sets of discounts in exchange for paying points.

As a rule of thumb, paying one discount point lowers a quoted mortgage rate by 25 basis points (0.25%). However, paying two discount points will not always lower your rate by 50 basis points (0.50%), as you would expect.

Nor will paying three discountpoints necessarily lower your rate by 75 basis points (0.75%).

Here’s an example of how discount pointsmay work on a $100,000 mortgage:

  • 3.50% with 0 discount points.Monthly payment of $449.
  • 3.25% with 1 discount point.Monthly payment of $435. Upfront cost of $1,000
  • 3.00%with 2 discount points. Monthly payment of $422. Upfront cost of $2,000

Payment estimates do not include realestate property taxes or homeowners insurance. They include mortgage principaland interest only.

Because they provide a lower interest rate, discount pointswill lower your monthly mortgage payments for the life of the loan. However,you’d need time for your low rates to translate into real savings.

In addition, banks consider this payment to be “prepaid mortgage interest,” which is tax-deductible for eligible tax filers. So for some mortgage borrowers, there’s an added tax advantage to buying points.

However, you don’t pay for discount points to get the tax break. You pay to get the mortgage rate break.

Are mortgage discount points worth it?

In the above example, the mortgageapplicant saves $14 per month for every $1,000 spent on mortgage points. To reclaim the full $1,000 costof the points, the homebuyer would need to make 71 regular monthly payments. That would take almost six years.

Home finance experts call the time it takes to recover yourupfront cost the “breakeven point.”  

Every mortgage loan will have itsown breakeven point for buying points.

If you plan to stay in your homebeyond the breakeven point and — this is key! — if you don’tthink you’ll refinance before the breakeven hits, payingpoints may be a good idea.

The longer you stay in the home beyond the breakeven point,the more you’ll save because the interest rate reduction continues generatingmonthly savings as long as you have the loan.

Selling your home or refinancing the mortgage before itsbreakeven point can make discount points a waste of money. In this case, you’ddo better to put the money toward your down payment to increase your homeequity.

According to Freddie Mac, thetypical 30-year fixed-rate mortgage loan carriesbetween 0.5 and 0.7 discount points.

Adjustable-rate mortgages tend to carry fewer points because ARM homebuyers intend to sell or refinance sooner. Points pay off only if you keep the loan long enough to realize savings from the interest rate reduction.

How mortgage points affect APR

Banks will sometimes use amortgage shopping tool known as “APR” to make a loan with discount points lookmore attractive than it really is.

APR, which stands for AnnualPercentage Rate, is a calculation which is meant to show the long-term cost ofholding a mortgage; and paying points lowers long-term costs in the form of alower mortgage rate.

But APR also assumes you’ll holdyour loan for 30 years. Very often, you will not, which nullifies the APR math.

This is why it’s important to remember that your APR is not your mortgage rate. Your mortgage rate is your mortgage rate.

Comparing loan estimates usingthe “lowest APR” method is rarely a good plan. It usesdiscount points against you.

If you’re not clear how much you’ll pay to borrow, ask your loan officer to walk you through your Loan Estimate or a truth-in-lending disclaimer.

“Negative”discount points (zero-closing cost loans)

Another helpful aspect of discountpoints is that lenders will sometimes offer them in reverse.

Instead of paying discount pointsin order to get access to lower mortgage rates, you can receive points from your lender and use the cash topay for closing costs and fees associated with your home loan.

The technical term for reversepoints is a “rebate.”

Mortgage applicants can typicallyreceive up to 5 points in rebate. However, the higher your rebate, the higheryour mortgage rate.

Here is an example of how rebatepoints may work on a $100,000 mortgage with a 30-year loan term:

  • 3.50% with 0 discount points.Monthly payment of $449
  • 3.75% with 1 ‘negative’ discountpoint. Monthly payment of $463. Credit of $1,000 toward loan costs
  • 4.00%with 2 ‘negative’ discount points. Monthly payment of $477. Credit of $2,000toward loan costs

Payment estimates do not include realestate property taxes or homeowners insurance. They include mortgage principaland interest only.

Homeowners can use rebates to payfor some, or all, of their loan’s closing costs. When you use arebate to pay for all of your closing costs, it’s known as a zero-closing costmortgage loan.

Zero-closing cost mortgages reducethe amount of cash required at your closing. The lender rebates can cover bankcharges origination fees along with closing costs charged by thirdparties.

Buyers who are using low-or no-down payment mortgages may find this option appealing — especially if they’re worried about keeping money in savings for emergencies or other life events.

When you do a zero-closing costrefinance, you can stay as liquid as possible with all of your cash in thebank.

Rebates can be good for refinancing,too.

Using rebates, a loan’s completeclosing costs can be ‘waived,’ allowing the homeowner to refinance withoutincreasing their mortgage amount.

When mortgage rates are falling, zero-closing cost mortgages are an excellent way to lower your rate without paying fees over and over again. You could potentially refinance three times in a year or more and never pay fees to the bank.

Are mortgagepoints tax-deductible?

Discount points can betax-deductible, depending on which deductions you claim on your federal incometaxes.

To write off discount points, or any other qualifyingmortgage interest payments, you’d need to itemize your deductions usingSchedule A of Form 1040.

If you take the standard deduction, you will not be able todeduct mortgage interest or mortgage points.

Discount points paid on a home purchase mortgage loan can be 100% deductible in the year in which they’re paid. Discount points on a home refinance mortgage loan cannot.

The tax deduction for points paidon a refinance loan is spread over the life of the loan. A homeowner payingpoints on a 30-year mortgage loan can claim 1/30 of the points paid as adeduction annually.

Always consult a professional before filing. This website doesn’t give tax advice. Let your tax preparer know if you’d to write off mortgage interest payments and discount points.

What aretoday’s mortgage rates?

Today’s mortgage rates are at historic lows. Mortgage points allowborrowers to buy down their interest rate even further, which can generate hugesavings.

However, mortgage points aren’t always worth it. And if you opt notto pay for them, you’re still ly to get a great deal in today’s ultra-lowrate environment.

Verify your new rate (Mar 25th, 2021)

Источник: https://themortgagereports.com/13644/discount-points-for-mortgages-explained-in-plain-english

When Should You Pay Points on a Mortgage?

What are mortgage points ⁠— and how do they work?

Mortgage points are fees that you pay your mortgage lender upfront in order to reduce the interest rate on your loan and, in turn, your monthly payments. A single mortgage point equals 1% of your mortgage amount. So if you take out a $200,000 mortgage, a point is equal to $2,000.

By doing this, you’ll pay more now, but you’ll be reducing your long-term costs. any financial decision, this isn’t necessarily a good move for everyone, though.

As you decide if paying for mortgage points makes sense for you, speak with a local financial advisor about how a home loan can affect your long-term financial plan.

What Are Mortgage Points?

Mortgage points essentially are special payments that you make at the closing of your mortgage in exchange for a lower interest rate and monthly payments on your loan. That’s why buying points is often referred to as “buying down the rate.” The move can lower what you pay your mortgage lender in the long-run, and it can also get you closer to owning your own home outright sooner.

In the home buying world, there are two types of mortgage points:

  • Discount points: These are basically mortgage points as described above. The more points you buy, the more your rate falls. Lenders set their own mortgage point framework. So the depth of how far you can dip your rate ultimately depends on your lender’s terms, the type of loan and the overall housing market. But you can expect to lower yours by one-eighth to one-quarter of a percent.
  • Origination Points: These cover the expenses your lender made for getting your loan processed. The amount of interest you can shave off with discount points can vary, but you can typically negotiate the terms with your lender. These are part of overall closing costs.

How to Calculate Mortgage Points

Picture this scenario. You take out a 30-year-fixed-rate mortgage for $200,000 with an interest rate at 5.5%. Your monthly payment with no points translates to $1,136.

Then, say you buy two mortgage points for 1% of the loan amount each, or $4,000. As a result, your interest rate dips to 5%. You end up saving $62 a month because your new monthly payment drops to $1,074.

To figure out when you’d get that money back and start saving, divide the amount you paid for your points by the amount of monthly savings ($4,000/$62). The result is 64.5 months. So if you stay in your home longer than this, you end up saving money in the long run.

Keep in mind that our example covers only the principal and interest of your loan. It doesn’t account for factors property taxes or homeowners insurance.

When Are Mortgage Points Worth It?

If you are buying a home and have some extra cash to add to your down payment, you can consider buying down the rate. This would lower your payments going forward.

This is a particularly good strategy if the seller is willing to pay some closing costs. Often, the process counts points under the seller-paid costs.

And if you pay them yourself, mortgage points usually end up tax deductible.

In many refinance cases, closing costs are rolled into the new loan. If you have enough home equity to absorb higher costs, you can pay mortgage points. Then you can finance them into the loan and lower your monthly payment without paying pocket.

In addition, if you plan to keep your home for a while, it would be smart to pay points to lower your rate. Paying $2,000 may seem a steep charge to lower your rate and payment by a small amount. But, if you save $20 on your monthly payment, you will recoup the cost in a little more than eight years.

The lower the rate you can secure upfront, the less ly you are to want to refinance in the future. Even if you pay no points, every time you refinance, you will incur charges. In a low-rate environment, paying points to get the absolute best rate makes sense. You will never want to refinance that loan again.

But when rates are higher, it would actually be better not to buy down the rate. If rates drop in the future, you may have a chance to refinance before you would have fully taken advantage of the points you paid originally.

Should I Pay for Points on My Mortgage?

If you can’t afford to make sizable upfront payments at the closing of your mortgage application, you may want to keep the current interest rate and refinance your mortgage at a later date.

Refinancing a mortgage is basically taking out a new loan to pay off your first mortgage, but you shop for a better interest rate and terms on the new one.

This makes sense if you’ve made timely payments on your old mortgage, have paid off a decent amount of your principal, and improved your credit score since you first obtained the initial mortgage.

If you’ve got some money in your reserves and can afford it, buying mortgage points may be a worthwhile investment. In general, buying mortgage points is most beneficial when you both intend to stay in your home for a long period of time and can afford mortgage point payments.

If this is the case for you, it helps to first crunch the numbers to see if mortgage points are truly worth it. A financial advisor can help you through this process if you don’t know where to start.

What Are Origination Fees?

Why do so many lenders quote an origination fee? To get a true “no point” loan, they must disclose a 1% fee and then give a corresponding 1% rebate. Wouldn’t it make more sense to quote a loan “at par” and let the borrower buy down the rate?

The reason lenders do it this way is because of the disclosure laws in the Dodd-Frank Act. If the lender does not disclose a certain fee in the beginning, it cannot add that fee on later. If a lender discloses a loan estimate before locking in the loan terms, failure to disclose an origination fee (or points) will bind the lender to those terms.

This may sound a good thing. If rates rise during the loan process, it can force you to take a higher rate. Suppose you applied for a loan when the rate was 3.5%. When you are ready to lock in, the rate is worse.

Your loan officer says you can get 3.625% or 3.5% with the cost of a quarter of a point (0.25%). If no points or origination charges show up on your loan estimate, the lender wouldn’t be able to offer you this second option.

You would be forced to take the higher rate.

Tips for Buying a Home

  • Buying a home is no small feat, so it can be helpful to work with a financial advisor to figure out your finances beforehand. SmartAsset’s free financial advisor matching tool can pair you with up to three advisors in your area. Get started now.
  • Before you fall in love with your dream home, figure out what prices are actually within your budget. To help you out, check out SmartAsset’s how much home can I afford calculator. All you need to know is where you’re looking for homes, your marital status, your annual income, your current debt and your credit score.

Photo credit: ©iStock.com/ziquiu, ©iStock.com/courtneyk, ©iStock.com/bonnie jacobs

Источник: https://smartasset.com/mortgage/when-should-you-pay-points-on-a-mortgage

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