How Points Affect Your Mortgage Calculation
Mortgage points are fees that you pay for a reduced interest rate. Essentially, you are paying for a discount, vaguely similar to Amazon Prime or a members-based warehouse store. By paying for points upfront, you are "buying down" the interest rate over the life of the loan.
These points are different than "origination points." Origination points are fees payable to the lender to cover the cost of the loan.
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Read below to find out the basics of mortgage points and how it affects your home loan.
Reducing Your Mortgage Interest Rate With Points
In home loan terms, one point is equal to one percent of the home loan amount. For example, if the amount borrowed is $350,000, one point would be $3,500, two points is $7,000, and so forth. How Points Work When you pay for points upfront, it allows the lender to adjust the fees associated with the size of your loan.
Discount Mortgage Points Versus Origination Points
Remember, origination points are the fees paid to the lender for their services, such as helping you get matched with the right loan and seeing it through approval and funding.
Discount points, on the other hand, is an upfront fee that benefits you by lowering interest rates. When you receive a quote from a lender, you'll want to ask if that quote includes a discounted interest rate.
Your Points Are Tax Deductible!
The fee you pay for a discounted interest rate may be tax-deductible. This is yet another way that you can save money on your home loan. Talk to your tax professional for details on claiming mortgage points on your taxes.
Rolling Points Into Your Mortgage
Mortgage points are typically paid at closing and may be included in your closing costs or your mortgage balance. Choosing to roll the point fees into the loan should be carefully considered. Your current home equity, as well as other factors, may make including the fees in your mortgage a poor option in your case.
Rolling the points into the loan may also increase the total interest to be paid on your loan, essentially undoing some of the benefits of the lower interest rate.
We understand that all this may seem confusing at first, but that is precisely what we are here for! We do all the heavy lifting, researching, calculating, and comparing scenarios to help you understand your options.