US mortgage rates have dropped to their lowest levels following the cut due to the coronavirus outbreak. But there’s a way to make them lower by racking up mortgage points.
What Are Mortgage Points?
Also known as discount points, mortgage points are fees directly paid to the lender at the time of the closing in exchange for lower interest rates. “Buying down the rate” is a valid way of lowering one’s mortgage payments.
Some lenders may offer the option of paying points when taking out a mortgage or refinancing an existing loan. What they are essentially asking is for the borrower to pay the interest in the loan in advance. In most cases, one point will knock off .25% off the mortgage rate and cost the borrower about 1% of the total mortgage. For example, to lower the mortgage cost of a $250,000 mortgage by .25% would require $2,500.
Mortgage points must be paid at the closing. One would be able to see these points listed on their Loan Estimate, the document summarizing the key details of your loan offer, and the closing disclosure, the five-page form lenders issue three days before the closing.
Buying points may give the borrower a tax benefit. Mortgage points are tax deductible as mortgage interest on a primary or a secondary home. It is ideal to seek the advice of a tax professional to see how it can affect one’s tax situation.
Are Mortgage Points Worth It?
Mortgage points are worth it if the borrower is planning to stay long in the home that he or she is purchasing. The longer one plans to own the home, the more savings one can have from interest savings compared to the upfront amount paid to buy points.
To figure out one’s break-even point, divide the cost of the points by how much one saved on the monthly payment. The resulting figure is how long it takes for the monthly payment savings to equal the cost of the points. For example, one mortgage point in a $200,000 mortgage with a rate of 4.25% will result in a .25% reduction in monthly payments, or $954 instead of $983. To recoup the $2,000 spent on buying that one point will only take about 69 months. If the borrower plans to stay in the home throughout that 30-year period, he or she would save $10,502 in interest.
Another factor to consider is the down payment. Putting down a down payment lower than 20% would require one to pay for private mortgage insurance, which may negate the benefit of the point. Run the numbers first.
Also keep in mind that mortgage points for adjustable-rate mortgages (ARMs) may only provide a discount on the interest rate during the initial fixed-rate period. After the initial fixed-interest rate period, the lender will adjust the borrower’s rate based on the relevant index. Again, determine first if the break-even point will occur before the fixed-rate period is over.
Make The Best Decision
Planning to take out a mortgage? Call (949) 284-2700 to receive expert advice from a Loanbox Mortgage consultant or visit Loanbox Mortgage for a free quote.