Advertising disclosure: This article is published by Best Rate Loan LLC, a licensed Michigan mortgage broker (NMLS #2075205), and is advertising. It is not an independent review, ranking, or comparison, and it is not financial, tax, or legal advice. We have a financial interest in the products discussed. Information is general and for educational purposes only; it is not an offer of credit or a commitment to lend. Rates, programs and program terms change without notice.
As a first-time home buyer in Michigan, you may get confused and overwhelmed by some of the lending lingoes. There is no doubt that phrases such as Loan Estimate, Closing Disclosure, and Right of Rescission may feel overwhelming, especially when you are not familiar with them. Similarly, when you hear the term mortgage points, it can be very confusing, which also makes it very hard to determine whether or not they are a smart choice for you. What are mortgage points? Read on to find out.
What are Mortgage Points?
We can define mortgage points as the fees that borrowers pay to buy down the interest rate on their mortgages. Did you know that mortgage points are also called discount points or buy-down points?
In other words, mortgage points represent prepaid interest that will help lower your monthly mortgage payment by reducing the interest rate on your loan. It is worth noting that a mortgage point is equal to 1% of your total loan amount. So, for instance, on a $200,000 loan, a point would be $2,000.
As a Michigan homeowner looking to purchase a home, you can buy discount or mortgage points in order to reduce your interest rate during closing. This is great as it can result in a lower monthly mortgage payment, leading to a more affordable mortgage in the long run.
Is it a Good Idea to Buy Points on a Mortgage?
As you can see, mortgage points may save you considerable money over time by reducing your interest rate. However, keep in mind that it does not always make sense to buy them. Depending on how long you plan to keep your mortgage, opting to purchase discount points can be an excellent decision or a poor one.
You should know that mortgage points can cost you thousands of dollars upfront. This adds to the overall cost of obtaining your mortgage. However, the good news is that because they reduce your interest rate, discount points help you save money on monthly payments and can eventually make up for the high initial cost.
You will be happy to know that after you have covered the total cost of the points that you paid at closing time, all extra savings from the reduced interest rate is additional cash in your pocket.
To determine whether buying points is worthwhile for your loan, it is essential to calculate your loan’s break-even point. You should ask your lender or bank the amount you will save in monthly interest by buying mortgage points.
All you have to do is divide the cost of discount points by this amount in order to get the number of months that it will likely take to break even on your loan.
For example, let’s say you save $150 per month by buying points. You should divide $6,000 by $150 in order to get a break-even point of forty months. So, if you expect to keep the loan longer than about 40 months, buying points may be worth it.
Is it Better to Buy Points or Put More Money Down?
As a home buyer, this is another important consideration. If you are not planning to pay 20 percent down on your mortgage, it is important to factor the cost of PMI (private mortgage insurance) into the above calculations.
You may know that PMI is a premium you pay with your monthly mortgage payments until you reach 20 percent equity on the home. Let’s get back to the above example. If you only put down 10 percent on the mortgage loan ($30,000) and the required PMI costs around $150 per month, it would offset the savings associated with purchasing points.
To be sure, you should work with your bank or lender in order to determine when you will likely reach 20 percent equity. After that, compare this number with the break-even point. This will help you decide whether or not it is sensible to increase your down payment rather than buying down the interest rate.
Are mortgage points tax deductible?
Possibly — but it depends entirely on your individual tax situation, and we are not able to advise
you on it.
Whether points produce any tax benefit for you can depend on whether you itemize deductions rather
than taking the standard deduction, whether the points were paid in connection with a purchase or a
refinance, the amount of your mortgage relative to the applicable acquisition-indebtedness limits,
how the points were paid, and the tax law in effect for the year in question. Tax law changes, and
the answer that applied in a prior year may not apply now.
Best Rate Loan LLC does not provide tax, legal, or accounting advice, and nothing here should be
relied on as tax advice. Please consult a qualified tax professional about your specific
circumstances before making a decision based on an expected tax benefit.
What is the Difference between Discount Points and Origination Points?
We can define origination points as the fees you pay to lenders in order to originate, review as well as process your loan and they usually cost 1% of the total mortgage. However, it is worth noting that not all lenders charge origination points.
Also, note that origination points usually vary from one lender to another, and one origination point represents 1 percent of the mortgage loan.
How Long does it Take to Break Even on Mortgage Points?
It is important to consider how long you’ll be living in your Michigan home to make sure that you’ll break even on the total cost of the discount points. When you consider mortgage points, you should calculate how long it takes to recoup the upfront costs of buying points. And this is often known as the break-even period.
In order to calculate the break-even point, you have to first determine the amount of money you will save on a monthly basis with the lower interest rate. After that, divide the cost of points by your monthly savings. The result is the number of months it takes to break even.
Final Thoughts
Many factors go into whether you should buy discount points in order to buy down the interest rate. However, you do not need to crunch the numbers yourself.
If you need help determining if mortgage points are right for you, you should get in touch with a home loan expert that you can trust so that you can make the right decision.
This article is general educational information, not advice, and not an offer of credit or a commitment to lend. Mortgage rates, loan programs, down payment assistance program terms, and tax rules change frequently, and the information here reflects our understanding as of the last review date shown above. Verify current program terms with a licensed mortgage loan originator before making a decision. Best Rate Loan LLC does not provide tax, legal or accounting advice.
