This is a great question. But before I can answer why you’d want to pay mortgage points, let me explain what mortgage points are.
One Mortgage Point Equals 1% of the mortgage amount
A mortgage point is a fee which equals one percent of the mortgage amount. If your mortgage has an amount of $300,000, this fees is equal to $3000. You don’t have to pay this fee. But it may be in your best interest to do so. By now you are thinking “Why would I pay a fee of $3000 if I don’t have to?”. Keep thinking while I explain further.
The are two kinds of mortgage points, Discount Points and Origination Points.
A Discount Point is actually prepaid interest on the loan. By paying discount points, you are lowering the interest rate on the mortgage. This rate reduction will lower your monthly payment. Currently, a discount point is tax deductible. We will wait and see if the new tax plan will continue to allow that.
An Origination Point is charged by the lender. This is to cover the costs of the lender making the loan. Current tax rules state that they are tax deductible if they are used to pay necessary costs to obtain the mortgage, not for closing costs.
Please remember that I am a Realtor, not an accountant or a financial adviser. Please check with a professional and do not rely on me for your financial advice.
So now let’s talk about why you may want to pay points. It really boils down to the numbers. You can make a simple calculation to find the monthly principal and interest costs for a mortgage with and without points. By paying two points at closing, you may be able to reduce your interest rate by half a point. On a $200,000 30 year loan at 4%, the monthly payment will be $955. If you reduce the interest rate to 3.5% the payment will be $898. As a result, you’ll see a savings of $57.00 per month. My math shows me that in 70 months you will be ahead of the game.
But to make it easy, if you plan on staying in the home for more than six years, it will probably be to your benefit to pre pay points.
Would it be to your benefit to pay mortgage points? Do the math and make your decision, because I cannot do it for you. But I can help you find that new home. Contact me, Art Reiman, Realtor.