How Mortgage Points Work

Mortgage points are a type of fee that is added to the total cost of a loan at the time of closing. Mortgage origination points are used to compensate the lender for the loan's formation, whilst discount points are used to lower the mortgage's interest rate.

Origination points and discount points are the two types of mortgage points available. Each point is usually equal to 1% of the total mortgage amount in both circumstances. One point is comparable to $3,000 on a $300,000 home loan, for instance. The lender's official loan estimate and closing disclosure include both sorts of points as part of the closing fees.

Loan officers are rewarded with origination points. The payment of origination points is not required by all mortgage lenders, and those who do are frequently prepared to lower the fee. Because origination points are not tax-deductible, several lenders have moved away from them, with others offering flat-fee or no-fee mortgages.

Prepaid interest is what discount points are. Each point you buy reduces your mortgage's interest rate by 0.25 per cent on average. Most lenders allow you to buy discount points in increments of a fraction of a point up to three.

Origination points were not tax-deductible before the adoption of the Tax Cuts and Jobs Act (TCJA) in 2017, which applies to tax years 2018 through 2025. Discount points will be deductible in the future, but only up to $750,000 of a loan's total amount. Furthermore, because the standard deduction is larger, it's a good idea to consult a tax accountant to see if buying points will save you money on your taxes.

Here, we'll talk about discount points and how they can help you save money on your mortgage. Keep in mind that lenders may promote a rate based on the purchase of points when the market rates.

When deciding whether or not to pay for discount points, consider the following two aspects. The first consideration is how long you intend to stay in the home. In general, if you purchase discount points, the longer you plan to stay, the more you will save. For a 30-year loan, consider the following scenario:

The cost of discount points is approximately 1% of the loan amount.

The three discount points would cost $3,000, but you'd save $39 every month if you bought them. To break even on a point buy, you'll have to hold the house for 72 months, or six years. Because a 30-year loan lasts 360 months, buying points is a smart choice if you intend to stay in your new house for a long period. If you only intend to stay for a few years, on the other hand, you may want to buy fewer points or none at all. On the Internet, you may find a variety of calculators to help you figure out how much money you'll need.

The second element to consider when purchasing discount points is if you have sufficient funds to cover the cost. Many people can barely afford a down payment and closing costs on a property, and there isn't enough money left over to invest in points. Three discount points on a $100,000 home are reasonably priced, but three points on a $500,000 home will set you back $15,000. An additional $15,000 down payment, on top of the standard 20% down payment of $100,000 for that $500,000 home, maybe beyond the buyer's means.

To budget for these expenses, a mortgage calculator is a helpful tool.