How are Mortgage Points Paid?

If you have a mortgage, you have probably heard about the term buying down your mortgage rate or discount points, and you probably want to know how are mortgage points paid. In this guide, you will learn how to lower your mortgage rate and how to do that the easiest way.

How are mortgage points paid? Mortgage points are paid when you close on your mortgage loan. Points are typically paid by the borrower as part of their closing costs. One point equals one percent of your loan amount. So, if you’re taking out a $200,000 loan, one point would cost you $2,000. Mortgage points are paid upfront, in one lump sum.

Still, the discount points can vary between lenders, but if you know from the start what one point is worth, you can easily do the math yourself. Here is all you need to know about them.

What Are Discount Points and How Do They Work to Your Advantage?

As you know, when you apply for a mortgage, depending on your FICO score, price of the house, and Debt-to-Income Ratio, you will get monthly installments you have to pay once you buy a home.

Aside from closing costs, payments will include other fees such as mortgage insurance and interest rate. The interest rate can be deducted by buying off your principal loan. This way, you buy points from your lender, and he will reduce your rates in exchange.

There are two types of points – a discount and origination ones.

The origination points are the fees you will pay for loan officers, and you can negotiate with your lender to pay these off. Still, not all providers require the payment of origination points. Many have shifted away from them since they are not tax-deductible.

How Does Discount Points Work?

The discount points are available for all borrowers if they wish to pre-pay their interest rate. Each point can cost thousands of dollars upfront, adding to the cost of your loan.

Still, once you pay off the points, your interest rate will lower, which means your monthly payments will be lesser. This way, you will save a bit each month, and the initial expenses will be recovered in no time.

How to Calculate a Mortgage Point and Reduction of Interest Rates?

Usually, one point is 1% of your total loan, a principal loan. So if you have a $200,000 loan, one point will cost you $2,000. The deduction of interest rate will go by a percentage, and one point will be 0.25%.

Let’s see how this might look in an example. If you take a loan of $300,000 for 30 years, here is how much you will pay without and with points.

Points	Money you need to invest	Interest rate	Total interest rate over the 30 years
0	0	3.50%	$185,000
1	$3,000	3.25%	$170,000
2	$6,000	3.0%	$155,300

Calculate Your Break-even Point

Also, when calculating whether you should buy off your rates, you should also calculate when these deductions will start saving you money. So, in essence, you need to calculate when you will pay off the money you put down to deduct your rates.

If you buy 3 points for $3,000, you will save $33 per month, which means you will be even and start saving money in 91 months. That is a 7.5 year period, and if you decide to do this, you will have to be sure you will stay in the house at least that long if this is to have any financial sense.

Compare Home Loans at Different Lenders Before You Decide

When deciding which lender you should choose, the discount points should be in the equation. And yes, interest rates, lenders’ fees, and other expenditures are important, but so are discount points. When shopping for lenders, you need to read fine prints and be careful.

For example, if two lenders offer you the same fixed interest rate, but one is charging a point, you will have to pay that upfront.

So for you, the better deal will be to go to the lender that offers you the same fixed rate but without the option to buy any point.

Keep in mind that many lenders will have them factored in, so make sure you read the contract before closing. These matters are usually listed on the second page of your contract.

Now That You Know How Are Mortgage Points Paid, It Is Time To  Consider Is It Worth It?

First, you need to calculate how long it will take to recover from the upfront expenditures you will have. If this time period is not working for you, then you shouldn’t invest any money in it.

On the other hand, in the long run, the amount of money you will invest will reduce your monthly expenditures, so if you feel safer to pay upfront to have lower payments each month, this will be a great deal for you.

Even more so if you are planning to stay in that house for a long time.

Still, keep in mind that you have to decide on discount points before you make a closing deal with a lender. So if you feel your rates are not reducing the way you want, look for other lenders.

But in the end, like with any long-term investments, it may seem like you are only losing money, but when you think about it, $3,000 upfront is not a big amount compared to the amount of money you will save over the years.