What Are The Pro’s And Con’s Of Paying Points On Your Mortgage Rate?

Mortgage-FormA point for a mortgage is equal to one percent of the total mortgage cost. Therefore, if your mortgage is $300,000 one point will equal $3,000, one half point will equal $1,500 and one quarter point will equal $750.

 

There are two types of points. Discount points are applied to reduce the interest rate charged for the mortgage loan. The points are fees you pay upfront.

The second type of points are rebate points. Rebate points can be used to avoid spending out of pocket cash at closing. These points are used to cover these expenses.

With the discount points, one point is equal to between one eighth and one quarter of one percent of the interest rate charged. When interest rates are high lowering the rate can be very helpful. With interest rates at a very low point you may not want to consider paying the discount points.

If you mortgage rate is proposed at 3.5% and you pay one point your new interest rate may then be 3.25%

If you lower your interest rate it means the monthly payment will be lower. By paying some points to lower the mortgage rate you may be able to qualify to purchase a more expensive home.

When you are paying a lower interest rate you will build equity in the home faster.

mortgage-points-600cs041712When you are planning to remain in your home for a long period of time it may be advantageous to pay discount points. If you are only expecting to stay in your home for a short time, paying discount points may not be a benefit.

Of course, over the life of your mortgage the lower your interest rate the more money you will save on interest payments.

Rebate points can permit you to close your loan without paying out your own cash.

When you cannot or do not want to pay your own closing costs, the rebate points are added to the cost of the mortgage payment amount.

Using this method you will be paying a higher interest rate since you will be paying for these rebate points applied at closing for the life of the mortgage.

Discount and rebate points are available for the purchase of a new mortgage as well as for the refinance of an old mortgage.

Whether you take advantage of points is entirely up to you. It depends on your financial situation. Is this the only way you can qualify for a more expensive home? Can you afford to pay for discount points at the time you take out your mortgage? Will paying down the interest rate be helpful for you or are interest rates so low it doesn’t make much difference? Are you planning to stay in your home for a long period of time to make the upfront payment worthwhile?

Using rebate points also depends on your individual circumstances. Do you have the out of pocket money needed for closing or do you need to finance this? Are you willing to pay the higher monthly payment each month for the life of the loan?

Points paid on a loan may be tax deductible. There is a difference in the rules applied for a new mortgage or a mortgage refinance. Be sure to consult your tax professional for the proper tax treatment of points.