As you prepare to purchase your first home in Colorado Springs, you may have already applied and been pre-approved for a mortgage. There were probably more than a few terms that you had to look up as you went through that process, including closing costs, interest rates, and down payments. On top of that, you might have heard the term mortgage points. While not every mortgage offers them, they can be beneficial and help you save money. What are they and how can they help you save money? Let’s find out!
What Are Mortgage Points?
A point is a fee that is equal to 1% of the mortgage amount. There are two kinds of points, discount and origination.
The discount points are prepaid interest on your mortgage. The more points you pay, the lower the interest rate on your loan. Each point is likely to lower your interest rate approximately 1/8 to ¼ of a percent.
As a borrower, you may have the option to pay from zero to several points, depending on how much of a rate reduction you are after. Recognize that each lender has their own price structure, so you may find that your options to lower your rate are limited by the lender, loan type, and the mortgage market.
Origination points are meant to cover the costs of processing your loan. They give you another option to cover closing costs, and the best part is that you are going to be able to negotiate these points. The number of origination points charged by a lender will vary, so it is important to ask your potential lender about them during the phase when you are still shopping for your mortgage.
Keep in mind that the terms for these points may also be different from lender to lender, so if you are confused, talk with your lender for clarification. You might also be able to roll the points you purchase into your loan, so be sure that you understand all the options before deciding to purchase points.
What Makes Points Worth Buying?
There are two factors that are going to impact whether it is a good idea for you to buy points as part of your mortgage. First, how long are you planning on staying in your home? If you are planning on moving or refinancing in the next few years, then you would probably not want to consider purchasing points, as you won’t see the financial benefit in terms of the lower interest rate to justify the cost of the points.
On the other hand, if you are staying in the home for a longer period, then points might be worth it to reduce your interest rate and increase your savings over the life of the loan.
Secondly, you need to consider how much money you are already going to have to invest in closing costs. The more points you add, the likelihood that you are going to have to bring more to the table at closing. Choosing a zero points option can help you to reduce those closing costs.
Using a mortgage calculator, you can determine how much you might save by paying for discount points.
Discount points may also be tax deductible as mortgage interest, if you itemize your deductions and it is your primary residence or a secondary rental property, whereas origination points are usually deductible on rental properties. Check with a tax professional to see if your points will be deductible at tax time.
Now the cost of discount points may be able to be rolled into your mortgage, depending on the lender, but you may also pay for them out of pocket. Whether you decide to purchase points or not is going to be based on the math, finding the right mix for your finances and your future plans.
To get an estimate regarding how much points might lower your interest rate, contact us to discuss your loan needs.