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Understanding Mortgage Points or Discount Points: Are They Worth It?

In the world of mortgage financing, there are many terms and concepts that can leave potential homebuyers scratching their heads. One such term is mortgage points, or “discount points”.

For some, understanding the way points work can feel like delving into a complex puzzle, even for experienced buyers or investors. But fear not — we’ll demystify the concept of mortgage points, explore how they work, and help you choose the right path.

Gaining knowledge about this seemingly enigmatic aspect of real estate can be the key to unlocking substantial savings on your mortgage and getting the dream home you’ve always wanted. So, let’s answer the burning question: are mortgage points truly worth it?

Back to Basics

Simply put, mortgage or discount points are a form of prepaid interest or fee that you can opt to pay at closing to lower your mortgage’s interest rate. 

In return for this upfront payment, your lender will offer a reduced interest rate on your mortgage, lasting through the life of your loan. This can decrease the total cost of buying a home and can help you rack up big-time savings in the long run. It’s also sometimes referred to as a “permanent” mortgage rate buydown.

Let’s look at an example. Suppose you’re applying for a $250,000 mortgage at a 7% interest rate for a 30-year term. By purchasing one mortgage point for $2,500 (1% of $250,000), you may be able to lower your interest rate by 0.25% (depending on the market conditions). 

As a result, your interest rate would drop to 6.75%, giving you a lower monthly payment and potentially saving you thousands of dollars in interest payments over the life of the loan.

It’s important to consider the time-value of money and how long you intend to stay in your new home. The longer you plan to live there, the more sense it makes to buy down your interest rate through points, as you’ll enjoy the interest savings over an extended period. However, if you envision a shorter stay, the upfront cost may outweigh the potential long-term benefits.

Is It the Right Move?

Speaking of upfront costs, hopeful buyers know one of the biggest obstacles to becoming a homeowner is the somewhat intimidating amount of money due at closing.

When considering mortgage points, it’s imperative to evaluate your financial situation carefully. If you’re low on ready cash, there are ways to reduce your out-of-pocket costs during the closing process, and buying points may not be the best use of your money at this time.

Some homebuyers grapple with the choice of allocating their funds toward either a higher down payment or mortgage points. While a higher down payment reduces your loan amount, leading to lower monthly payments and potentially avoiding private mortgage insurance (PMI), purchasing points can result in substantial interest savings over time. 

Striking the perfect balance is key, as they both impact your finances over the long term. But here’s one important difference — buying points doesn’t help you build equity like a larger down payment does. 

Depending on your unique financial situation, you can potentially deduct mortgage points from your taxable income, which might lead to significant savings during tax season. However, as always, consulting with a tax advisor or financial expert is critical to fully understand the implications of using points to reduce your interest rate.

If you’re thinking about going this route to lower your interest rate, it’s crucial to determine the break-even point. This is the time it takes for the cumulative interest savings to reach the same amount you paid for your mortgage points, which can vary substantially, based on the cost of points and the amount of rate reduction. As long as you don’t refinance and remain in the home past breaking even, you’ll come out ahead.

It’s vital to partner with an experienced mortgage lender who can help you navigate this process and evaluate all of your options. There are many different loan products available and you should compare interest rates, origination fees, and the number of points you may need. What you choose will be based on your financial objectives and vision for the future.

Meeting Your Goals

The question of whether mortgage points are truly worth it ultimately depends on a variety of factors. If your credit score doesn’t qualify you for the lowest available rates, investing in points can be a smart way to keep your mortgage payment manageable.  

While points can offer substantial interest savings over the life of your mortgage, a thorough cost-benefit analysis is essential. The Chicagoland housing market is constantly changing, and the path to homeownership can be challenging as well as overwhelming.

Consulting with a top real estate team and a forward-thinking mortgage lender will ensure you’re getting an amazing deal and securing your future as a proud homeowner. I can help you meet your goals — reach out today!

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