Troy Stavros, Broker and Partner with the 865 Real Estate team stated, “With the latest announcement regarding the new Qualified Mortgage rules, we felt it was a good time to re-address one of the questions asked of us most often by our Knoxville real estate clients. That being, “what are points” in a mortgage?”
There are two types of “mortgage points”. Discount Points and Origination Points. In both of these, each point is equal to 1% of the total amount mortgaged. For example, on a $200,000 home, one point is equal to $2,000. The least helpful from a buyer’s point of view are the “origination points’, as they are simply used to compensate loan officers. Not all lenders require the payment of origination points, and if asked, many are often willing to negotiate the fee. Origination points are NOT tax deductible. Discount points, which can be helpful, are basically prepaid interest. The purchase of each point typically lowers the mortgage interest rate by 0.25%. For example, if your original rate is 3.5%, purchasing a point could lower it to 3.25%. Most lenders give you the opportunity to buy anywhere from 0 to 3 discount points. If you itemize your taxes, discount points are tax-deductible.
Stavros says that next question clients have is, should I buy the points. Stavros offered, “The two deciding factors when looking at buying points on your mortgage are one, how long do you intend on living in the home, and two, do you have the extra money to pay for them.” The longer you plan on staying, the larger your savings will be if you purchase discount points. A number of calculators are available on the internet to help you figure the appropriate amount of discount points to buy, based on how long you plan on owning the home.
Consider the following example from Investopedia:
On a $100,000 mortgage with an interest rate of 6%, your monthly payment for principal and interest is $599.55 per month.
With the purchase of three discount points, your interest rate would be 5.25%, and your monthly payment would be $552.20 per month.
Purchasing the three discount points would cost you $3,000 in exchange for a savings of $47.35 per month. You will need to keep the house for 63 months to break even on the point purchase. Since a 30-year loan lasts 360 months, purchasing points is a wise move if you plan to live in your new home for a long time. If, on the other hand, you plan to stay only for a few years, you may wish to purchase fewer points, or none at all.
The second and most important question with the purchase of discount points involves whether or not you have enough money to pay for them. Stavros says, “Buying a home in Knoxville can be expensive. With down payments and closing costs. Many buyers simply don’t have enough money left over to purchase points.”
Purchasing discount points can be a good way to lower your monthly mortgage payments if you plan on staying in your home for an extended period of time. However with today’s incredibly low rates, you really need to crunch the numbers to see if it’s worth it.