To be more precise, what is a point on your mortgage?
Mortgage Points are Fees
A mortgage point is a fee which is paid directly to a mortgage lender. These points are paid at the closing, usually by the buyer. However, sometimes the seller agrees to pay the points. In exchange for the lender receiving these payments, the lender will provide the borrower with a lower interest rate. Essentially the borrower is pre-paying mortgage interest to reduce the monthly payments.
Do you Understand?
Now you fully understand points – correct? If you did, I would be surprised. Let me explain further.
First , here’s some terminology. One “point” equals 1% of your mortgage amount. When you prepay one point to the lender, the lender reduces the interest rate by 0.25%
Here’s an example. If you have a mortgage amount of $200,000, and you prepay one point, you will reduce your interest rate from (let’s say) 3.5% to 3.25%. And it will cost you $2,000 to do this.
Now, here are the numbers. You would reduce your monthly payment from $898.09 (principal and interest) to $870.41. This is a savings of $27.68. If you prepay two points, your interest rate will be 3%, and your payment will be $843.21.
In fact, your $2,000 investment in prepaid interest will be recouped in 72 months. After the 72 months have passed, the money saved on lower payments will add up to $7971.84 if the mortgage lasts the full thirty years. Over a 30 year period, your investment, as in the examples above, will be in excess of a 5 times return. Sounds like an excellent investment to me.
An Extra Bonus
And here’s an extra added bonus. The prepaid points are tax deductible in the year they are paid in many cases.
In my opinion, if you plan on staying in your home for at least six years, points can be your friend. If you think you’ll be there less than six years, don’t do it. Either way, talk with your mortgage professional and / or your accountant to get their opinion.
When it’s time to buy that new home you’re thinking about, let us help you. We’ve helped hundreds of families find their new home. Call us – Bunny and Art Reiman – Realtors.