The Power of Motgage Points

by Darren Cason

There are slight variations to the structure and intricacies of home mortgages around the world, and one concept that seems for the most part to be unique to the U.S is the mortgage points system. These points come in two main types, origination and discount.

In both cases, a point is equal to 1% of the mortgage value, so on a $200,000 mortgage, a point would be equal to $2,000. Origination points are not tax deductible and may be required by some mortgages, though not all. Discount points on the other hand amount to prepaid interest, and each point paid for lowers the interest rate by an amount generally in the 0.25% range. The mortgage will have a maximum number of points that can be purchased, both within set periods of time, and throughout the entire course of the mortgage. Discount points is what we’ll mainly discuss in this article, and whether or not they’re worth paying for.

The main factor to consider when mulling over discount points is how long you plan to stay in the home. If this house is only a stopover on the way to something else, or if there’s a very real possible that you may have to relocate for work or other reasons, the value of points becomes diminished. If on the other hand this is planned to be a long-term project, points certainly make a good deal of sense.

Let’s say your mortgage is for $150,000 at 6%. The interest payments per month would be about $900. With the purchase of 3 points for $4,500 that rate drops to 5.25% and the monthly payments down to about $825. That’s a savings of approximately $75 per month, or about $900 a year. At this rate it would take 5 years before you break even on the initial purchase of points and then start to see returns. As you can see, if you’re only planning on staying in a home for a couple years, the savings are not going to outweigh the initial cost. If however you stay in the home for many years, you’ll be saving yourself a good deal of money in the long run, to the tune of almost $1,000 a year after the break-even point is reached.

There are a couple other things to consider. You may not have enough money to pay for points upon first taking on the mortgage. Most people put every ounce of savings they can muster into that down payment, leaving them dry for any further payments. The principle will still hold though when you do eventually have the money to pay for them if desired, be it a year or even 5 years after you’re purchase of the home. If you’ll still be in the house long enough from that point on to make it worthwhile, it’s certainly something to look into.

The other consideration is that it may actually make more sense to put that money into a higher returning investment instead, as a 0.75% interest savings could be easily duplicated and topped through investment. This is certainly one effective debt consolidation method even though many feel more comfortable simply having that guarantee of a lower mortgage payment each month. Watch any extra spending there will be no extra room for any debt consolidation with the equity in your home.

Purchasing a home is a major financial decision that will probably impact the rest of your life, and mortgage points are just another thing to consider on the home purchase front in the U.S. It’s a viable option that could certainly save you money long-term, but with the uncertainty many of us face concerning our futures, and the fact that the money could instead be invested for greater gains, the decision could go either way.

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