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Mortgage Points Explained
Mortgage points are a very commonly misunderstood concept in the mortgage process. The purpose of this blog post is to help you understand what mortgage points are and how they can be beneficial to you.
Points come in two forms:
Origination Points (or origination fee): This is a fee that is charged by the lender to "originate" your mortgage. It is a commission fee charged to you.
Discount Points: Discount points are charged for the purpose of buying down the interest rate- more on this later.
Origination points and discount points are calculated the same way. One point = 1% of the loan amount you are borrowing. So one point on a $100,000 mortgage would be a $1000 charge to you.
So the question you are probably asking is, why would I want to pay points?
The answer is simple. For each point that you pay up-front, you will obtain a lower interest rate. A "no points" loan will carry a higher interest rate than a mortgage for which points are charged. The trade-off is that although you are paying more closing costs by paying points up front, you will save money long-term through a lower mortgage rate and payment.
The key is working with a mortgage professional who can clearly present to you your options regarding points, and help you analyze whether or not it is a good financial move to pay points or not. If your monthly savings by paying points is $50 int he form of a lower payment, for example, and you paid $1000 in up-front points, then your break-even point would be $1000/$50 = 20 months.
One more key factor with points is that they are tax deductible in the year that you buy your home for a home purchase. For a refinance, you must amortize the cost of the point over the term of the loan. So in other words, if you paid $1000 for points on a 30 year loan, you can take a ($1000/30 years=$33.33) $33.33 tax deduction each year for 30 years. On the purchase example, you could deduct the entire $1000 the first year you own your home.
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