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What Are Mortgage Points?

What Are Mortgage Points? Photo

©Depositphotos/zwolafasola

Mortgage points are basically a form or an outline of pre-paid interest. Sometimes it is referred to as discount points. A single point is equivalent to one percent of your entire loan amount. By charging you, the borrower, of such points, the lender automatically increases his revenue on the loan. This is above the scale of the established interest rate.

The borrower is offered by this mortgage point payment method to help reduce their loan interest rate. In the short run, the positive effects will be felt. You will be expecting a lower monthly loan payment as soon as you have made this up-front payment. Your loan rate will be reduced by 0.125% if you will purchase one point.

Two Kinds Of Mortgage Points

Basically, there are two kinds of mortgage points. Although they are closely similar to each other in terms of their roles, still there is a lot of difference.

Origination Points

This kind of mortgage point is a kind of fee that borrowers pay to atone them for the part they’re playing in different aspects. Such aspects are the evaluation, processing and the mortgage loan approval. Your credit history is a very vital factor when it comes to the amount of your origination points. Such points are not tax deductible, unlike other similar points.

Discount Points

Oftentimes, this is the general name of mortgage points. On the contrary, it’s only a kind of point system and not the entire mortgage point itself. Discount points are a lot simpler compared to origination points. It’s basically a tax deductible payment scheme which is effective in reducing your monthly loan payment. It usually costs 1% of your entire loan. By purchasing a single point will reduce your interest by one-eighth of its whole amount.

Should I Purchase Such Points?

The decision to this query mostly focuses on your discount points. You should fully understand the entire mortgage payment structure to ensure that you’re making the right step. You should also consider the time-span you will live in that house. Technically, the longer you stay the bigger your savings will be. This is of course if you purchased discount points.

If you have a $100,000 loan with a 6% interest rate, your monthly fee will be $599.55, inclusive of the interest and principal rate. However, if you will purchase at least 3 discount points, your monthly fee will lower down to $552.20 each month. This is because of the 5.25% interest rate which also reduced due to the points.

Is It Worth It?

For some people, it’s better to invest in the stock market and generate a higher return. For others, paying for mortgage points, whether it’s a discount or origination, is a perfect choice to reduce their monthly fee. But, the answer to this question is solely in your hands.

Bottom Line

Buying your own home is not only a big financial decision. It’s also something that every couple wants. Wouldn’t it be great to have a home you can call your own? Although it can be difficult especially if you don’t have enough finances, there are still many choices for this aspect to be easier. The main key here would be to choose the perfect choice.