Mortgage points essentially are special payments that you make at the closing of your mortgage in exchange for a lower interest rate and monthly payments on your loan.
Picture this scenario. The result is So if you stay in your home longer than this, you end up saving money in the long run. Keep in mind that our example covers only the principal and interest of your loan. If you are buying a home and have some extra cash to add to your down payment , you can consider buying down the rate.
This would lower your payments going forward. This is a particularly good strategy if the seller is willing to pay some closing costs. Often, the process counts points under the seller-paid costs. And if you pay them yourself, mortgage points usually end up tax deductible. In many refinance cases, closing costs are rolled into the new loan.
If you have enough home equity to absorb higher costs, you can pay mortgage points. Founded in , Bankrate has a long track record of helping people make smart financial choices. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.
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The information on this site does not modify any insurance policy terms in any way. Buying a house is the most expensive purchase most of us will ever make, so naturally, anything that can reduce the cost of a mortgage is worth looking at. Mortgage points are the fees a borrower pays a mortgage lender to trim the interest rate on the loan.
Each point typically lowers the rate by 0. How much each point lowers the rate varies among lenders, however. The actual amount of the discount varies by lender and can fluctuate in response to movements in the bond markets and the direction of interest rates. One day a lender might drop the interest rate by a quarter-point in exchange for the payment of one discount point; the next day, the same rate reduction may cost more or less than it did the day before.
Most lenders give buyers the option of paying anywhere from a quarter of a point to upward of four points and more. So how can you determine whether paying points is, indeed, advantageous to you? The key is to determine your break-even point. Step one in making that determination requires that you estimate how long you intend to keep your mortgage. Yes, you may take out a year mortgage, but will you really keep the thing for the full 30 years?
Probably not. According to a recent survey by the National Association of Realtors, most buyers sell their homes and pay off their mortgages in 10 years.
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