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What Are Points On A Mortgage

    Mortgage calculators on QuickenLoans typically let you input your terms of the loan (rate, points, and fees) to allow you to compare different loans. You do not have to know how to calculate mortgage points in order to calculate savings, as lenders are required to create loan estimates reflecting the precise value of points charged. Because the exact amount of money you will save will vary depending on the lender, you will have to figure out what your interest rate – and monthly payments – will be both with points and without.

    For example, if your lender charges 1.5 origination points for a $300,000 loan, you would have to pay $4,500 down. If a lender charges 1.5 origination points on a $250,000 home loan, borrowers must pay $4,125. A half-point for a $300,000 mortgage, for instance, costs $1,500 and lowers the mortgages interest rate by roughly 0.125 percent.

    For instance, if you have a $300,000 mortgage with an interest rate of 3.5%, one point costs $3,000 and reduces your monthly interest rate to 3.25 percent. For example, if you are taking out a $100,000 mortgage, a single point costs $1,000. Each point usually reduces your interest rate by 0.25%, so a single point will reduce your 4% mortgage interest rate to 3.75 percent over the life of your loan.

    With mortgage discount points, you pay a down-payment upfront at closing, and in return, the lender reduces the interest rate on your loan. Each mortgage discount point typically costs one percent of the loan amount, reducing your interest rate for your monthly payments by 0.25 percent. If you choose to buy points, you pay a percentage of your loan amount to your lender when you close, and you receive a lower interest rate over the life of the loan. The biggest benefit to buying points is you will have a lower rate for your mortgage, no matter what your credit score is.

    As you can see, the longer you live in your house and pay the mortgage, the better you are at paying points up front in order to receive a lower rate. For the most part, the longer you expect to live in a house, the more points you purchase upfront, the more money you save in interest payments by paying less each month for the lifetime of your loan. This comes in the form of lower monthly mortgage payments, but it also has a large effect on the overall amount of interest you will pay over the life of the loan.

    The higher up-front costs are paid back in less interest paid over the life of the mortgage, and you will have to be a homeowner for the long haul to see these benefits. After five years, at $400, you will have paid $76,370 in interest payments, plus $8,000 for the mortgage points, totaling $84,370.

    Buying points makes financial sense if you will be in the house long enough, as over time, you will be able to save more money in interest payments than the points cost. Instead of buying points, many borrowers instead opt to make larger down payments (or to pay more toward the mortgage) in order to gain equity in the house faster and to get out of their mortgage sooner, which is another way to save on interest payments.

    Lenders provide borrowers with a number of rates/points combinations, leaving it up to the borrowers to pick the mix that is most appropriate to their needs. Low-rate/high-point loans are geared toward borrowers who are able to make their down payments and who have either a longer timeline or want to lower their monthly mortgage payments. While purchasing points to lower the interest rate of your mortgage is essentially prepaid interest, the annual percentage rate (APR) is one way to make comparisons between loans across a variety of interest rate/point combinations easier. Whether or not to pay discount points depends on several factors, such as whether you are getting a fixed-rate mortgage or adjustable-rate mortgage, how much down payment you have, and how long you expect to live in your home or hold onto the loan. When you purchase discount points on a new mortgage (or buy-down), the cost of those points represents pre-paid interest, so you generally get to deduct them off your taxes like regular mortgage interest.

    If you are able to deduct your mortgage interest, you can probably do the same thing with points paid on a home loan. Sometimes, prepaid payments are called buying down mortgage rates,a since paying points at closing of the loan lowers the mortgage interest rate over the life of the loan. With adjustable-rate mortgages, however, paying points toward a mortgage typically reduces your interest rate only through the end of the initial fixed-rate period; the reduction likely will not apply for the entire life of the loan (the term). Buying points for adjustable-rate mortgages provides only a reduction during the initial fixed-rate period of a loan, and is not typically done.

    If you are looking to get the lowest home loan rates possible, paying points for your mortgage might be something to consider. Remember, points are also negotiable, so if you are unhappy with the cost or with how much the points could reduce your interest rate, it might be worth asking your lender about the best arrangement.

    Once you have your quote from the lender, crunch the numbers to figure out whether paying points will lower your interest rates over the life of the loan. You will want to know what a lenders rates are without adding in a bunch of up-front fees. When you are doing your own mortgage search, if two lenders offered you a fixed-rate loan of $200,000 at 4.25%, but one was charging one point on this rate, you would be paying $2,000 more up front with this lender in order to get that same rate with another lender at no cost.

    For instance, you could be paying a half-point, or 0.5%, on your loan. Typically, every point costs 1 % of the loan amount, lowering your interest rate 0.25 percent, said Melissa Cohn, executive mortgage banker for William Raveis Mortgage.

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