When to Pay for Mortgage Points?
The decision to pay for mortgage points depends on two related variables, the interest rate that you are paying on your home loan and the amount of time that you are planning on staying in your home. The two types of mortgage points that you can pay for are origination mortgage points and discount mortgage points. Origination points are determined by the lender, are not tax-deductible, and do not benefit you, the borrower. They are not open for negotiation. Discount points are tax-deductible, benefit the borrower, and you decide whether or not to pay for them. This article pertains to the purchasing of discount points.
The Variables
The Break-Even Point
The break-even point is the amount of time that it will take for you to see the monetary benefit of paying for discount points. It is when the money that you pay for discount mortgage points upfront equals the amount that you have saved in monthly payments. The break-even point can be calculated by subtracting the amount that you would pay, per month, if you purchase the points from the amount that you would pay, per month, if you did not purchase the points. Then, take this difference and divide the amount that you paid for the points by this number. If you cannot work out the break-even point on your own, the Internet provides many easy to use mortgage point calculators. If your break-even point occurs within the time that you plan to spend in your home, it is worth the money to purchase mortgage points. If your break-even point occurs after you plan on moving out of your home, it is more cost effective to pay a higher interest rate and turn down the mortgage points.
The Variables
- Interest Rate: Each discount point that you purchase is equal to one percent of your total home loan. With each point, you will decrease the monthly interest rate that you pay by one quarter. If your interest rate is high, your monthly payments will be high. By lowering your interest rate, you are lowering your monthly payments.
- Length of Time: If you plan on staying in your home for a long period of time, purchasing discount points is a good idea. This way you pay a larger amount at the beginning, but make up for that expenditure in a relatively short period of time in the form of monthly savings. If you plan on moving in the near future, paying a higher upfront cost is a waste of money.
The Break-Even Point
The break-even point is the amount of time that it will take for you to see the monetary benefit of paying for discount points. It is when the money that you pay for discount mortgage points upfront equals the amount that you have saved in monthly payments. The break-even point can be calculated by subtracting the amount that you would pay, per month, if you purchase the points from the amount that you would pay, per month, if you did not purchase the points. Then, take this difference and divide the amount that you paid for the points by this number. If you cannot work out the break-even point on your own, the Internet provides many easy to use mortgage point calculators. If your break-even point occurs within the time that you plan to spend in your home, it is worth the money to purchase mortgage points. If your break-even point occurs after you plan on moving out of your home, it is more cost effective to pay a higher interest rate and turn down the mortgage points.
