In this article we are going to disclose the essence of mortgage points. There are two types of mortgage points – discount mortgage points and origination points. Discount mortgage points are designed to decrease payments for interest. One point is a discount of 0.25% for the basic interest rate. You can purchase maximum 3 points for a single mortgage. One point generally makes 1% of the house price. That means that if your interest rate makes 5,25% – it decreases to 5% if you purchase one mortgage point. For example, if you purchase house for 200’000 dollars one point will make 2’000$ – that’s what you have to pay to decrease interest rate on 0.25%.
Origination points are generally used to provide payments for loan officers. It is better to consider discount mortgage points. You can use it no matter what type of mortgage you are dealing with.
Pros of Discount Mortgage Points
It is definitely a good idea to purchase mortgage points in the most of the cases as you generally live in the house you purchased for many years. Let’s consider an example.
You are going to buy a house for 300’000 $ and the loan term makes 20 years, interest rate is 8%. You need to pay 2,509$ each month for 20 years and your overpayment will make 302’237$.
However, if you have bought 3 mortgage points for 9’000$ you will have to pay 2’371$ per month and overpayment will make 269’071$.
That means that paying 9000$ today will save you nearly 21’000$. And you will have to pay approximately 130$ a month less – which is significant.
So the pro for mortgage point – you save on interest payments if you live in a house for a period of time that allows you to exceed the amount of paid interest for mortgage points. In this case the break-even point is approximately 8 years and a half.
Cons of Discount Mortgage Points
You need to get a large amount of money and pay those. And you won’t be able to use this money to invest or buy something else. Yes, you will cut expenses on interest payment but what if you could make more money from those you wasted on mortgage points?
It is up to you to make that decision. There is no absolutely good or bad decision on mortgage points without considering a situation. If you are ought to invest – you should invest, but if your priority is to decrease debt payments as much as possible – it is a wise decision, too, as there is no guarantee you won’t lose your income tomorrow. It is also a bad idea to buy mortgage points if you are going to live in your house less than several years. All in all, if you need the best ideas to take a mortgage read this article.