If you’ve been looking for a home in the market, you may stumble upon the term “points”. They are also known as discount points that are associated with a mortgage. But what are discount points on a mortgage mean? Discount points are fees that you pay your lender in exchange for a lower interest rate on your mortgage. One point is equivalent to 1% of your total loan amount and each point can lessen the interest rate by 0.25%. For instance, if you took out a 100,000-dollar loan and want to pay 3 points upfront, you would be paying 3000 dollars (3% of 100,000) and that reduces the interest rate by 0.75%. Although this may sound like a good financial decision, you still need to consider some factors. Curious to find out more about points on a mortgage? Continue reading to learn more.
Benefits of Points on a Mortgage
Let’s delve right into the benefits of discount points. As mentioned above, the key benefit of points on a mortgage is lowering the interest rate. This means that during the timespan of your loan, you’ll only pay little interest. Moreover, there are other benefits that come with discount points, and here is a list of some:
- Lower monthly payments: low-interest rate is equal to lower monthly mortgage payments
- Long-term savings: Although you may need to pay upfront costs, your long-term savings can be substantial.
- Tax Benefits: When you pay points, tax may be deductible in some cases.
- Better Qualification: when your interest is low, then that means your mortgage payment is also low. This is beneficial for you if you are planning to qualify for a home loan.
Drawbacks of Points on a Mortgage
Of course, points on a mortgage are not for everybody as there are still drawbacks that come with it. Primarily, your upfront costs of buying increase and may be challenging for some. Aside from this, there are other drawbacks to buying points on a mortgage, and here are some examples:
- Longer break-even point: Paying points on a mortgage may not be worth it if you’re not going to stay in your home for a long time. This is because it may take several years to regain the upfront costs that you initially paid off.
- Less Flexibility: When you pay points, you can’t get that funds back if you plan to sell your home or if you decided to refinance. This limits your flexibility if ever your financial situation changes.
- May not be cost-effective: Depending on your financial situation and interest rate, it may not be the most effective way to lower your mortgage payment. For instance, some people may prefer to pay a larger downpayment than paying points on a mortgage as it is more cost-effective in their situation.
Discount points can be a good option for those who are determined to lower their interest rates and monthly payments. However, you must carefully consider your financial situation in the long run. Consulting with a mortgage professional may be your best bet to help you assess if paying points is a sound decision for you. Especially if you’re opting for a reverse mortgage, understanding the benefits and risks of discount points can help you make an informed decision that with fit your needs and goals. Feel free to contact us at Mann Mortgage to learn more about discount points.