Categories

Mortgage Basics

How Much Does a Mortgage Point Cost?

The cost of a mortgage point is determined by the value of your mortgage loan. Depending on the type of mortgage point, it could allow you to buy down your interest rate or may be a part of your loan origination cost.

How Much Do the Different Types of Mortgage Points Cost?

There are two types of mortgage points you may come across during the homebuying process: origination points and discount points. In both instances, the cost of a point is typically 1% of the loan amount. So if you have a $250,000 mortgage, the cost of one point is $2,500.

  • Origination points: These points are often included in the cost of originating your loan. They don't affect the interest rate on your loan but do allow you to compare costs among mortgage lenders while you're shopping around. This is because one lender may charge more or fewer points than another.
  • Discount points: During the mortgage process, you may be able to pay for discount points in exchange for a lower interest rate. In most cases, one discount point reduces your interest rate by 0.25%. For example, let's say you have a $250,000 mortgage with a 3.5% interest rate. By paying one point ($2,500), you could reduce your rate to 3.25%.

Origination points may be negotiable, especially if you've found another lender that charges less. With discount points, on the other hand, it only makes sense to pay them if doing so will save you money in the long run.

Continuing with the previous example, a $250,000 loan with a 3.5% rate would give you a $1,123 payment for principal and interest. If you were to buy down the rate to 3.25%, your monthly payment would drop to $1,088—a decrease of $35.

To find out if that's worth it, you'd divide $2,500 by $35, which tells you that you'd need to remain in the home without refinancing your loan for roughly 71 months, or about six years, to break even.

Is Buying Mortgage Points a Good Idea?

There are a handful of things to consider before you decide to purchase discount points. The break-even point is a good place to start when determining whether it's worth it for you, but here are some more specific examples of when you might want to consider it.

  • You don't plan to sell or refinance anytime soon. If you're settling down for a while and rates are low enough that you don't anticipate refinancing your mortgage, you may end up staying in the home long after the break-even point. In this case, it makes sense to spend a little more upfront to save in the long run.
  • You have the means to buy points. Saving for a down payment while also maintaining an emergency fund and contributing toward other goals, including retirement, can be challenging. If you have the cash to spare, it's worth considering using some of it to buy down your rate.

On the flip side, there are some situations where it's likely not a good idea to take advantage of discount points:

  • You won't be in your home past the break-even point. If you've run the numbers on how long it'll take to recoup your upfront costs and you anticipate selling the house or refinancing before that point, you'll end up spending more overall if you move forward buying points.
  • You don't have the means to make it happen. Draining your savings account to buy a home can cause problems if you need to make expensive repairs, you lose your job or something else happens and you need access to an emergency fund. If you don't have enough savings to cover both your down payment and an emergency expense, consider holding off on points.
  • There are better ways to use the cash. Even if you have enough money for a down payment and an emergency fund, consider other financial goals that could make a bigger impact than buying down your interest rate. Remember, it can take several years just to break even on points—if you can make better use of that money during that time, use it for that purpose instead.

Carefully go over all of your options and consider speaking with a mortgage professional to determine if buying discount points is right for you.

Are Mortgage Points Tax-Deductible?

Origination points are not tax-deductible because they're a cost associated with originating your loan. However, you may be able to deduct money paid for discount points because it's essentially prepaid interest.

The caveat is that you need to itemize your deductions on your tax return, along with regular mortgage interest, to take advantage of the tax savings. If all of your allowable itemized deductions add up to a sum less than the standard deduction for your filing status, it won't make sense to go that route.

Alternative Ways to Save Money on Your Mortgage

Paying for discount points will reduce your monthly payment and potentially save you money over the life of your loan, but it's not the only way to save money on an ongoing basis.

Here are some other options to consider, which you can use in addition to or in lieu of discount points:

  • Improve your credit score before applying. A mortgage loan is a significant commitment for both you and the lender, and the less risk you pose to creditors, the lower the interest rate you can get. Take some time to get your credit ready for a mortgage before you apply to maximize your savings. Start by checking your credit report and score to see where you stand, and to identify how you can make improvements.
  • Refinance your mortgage. If you already have a mortgage loan, you may be able to qualify for a lower rate if your credit has improved or if market rates have dropped significantly. Just keep in mind that refinancing a mortgage comes with its own closing costs, so you'll want to compare upfront expenses to the monthly savings to make sure you at least break even.
  • Try to get rid of your mortgage insurance. Lenders typically require mortgage insurance if your loan amount is more than 80% of the home's value. But if you've paid down enough of your balance or your home's market value has increased significantly, you may be able to request that the lender remove the mortgage insurance requirement. This process typically requires an appraisal, which you'll need to pay for out of pocket. Keep in mind, though, that if you have a government-insured loan, the mortgage insurance may not be waived unless you refinance it into a conventional loan.

Maintain Good Credit After Your Home Purchase or Refinance

It's important that you take the time to improve your credit before buying a home or refinancing an existing mortgage loan. But even if you don't plan to borrow money again in the near future, it's critical that you stay on top of your credit for when you do need it.

Experian's free credit monitoring service allows you to keep track of your credit file through real-time updates. You'll also be able to view your FICO® Score powered by Experian data and your Experian credit report at any time.

Using this free service will make it easier to spot potential issues, including fraud, before they do some serious damage. It'll also give you the information you need to maintain a good credit score and make adjustments to your financial habits as needed.