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Mortgage Points - An In Depth Look



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By : Roby Hicks    99 or more times read
Mortgage points are among the things you have to deal with when purchase a home. But what is it and why is it important? The said points play a role during the acquisition of the loan, the adjustment of monthly dues and the closing. This is why it is important to discuss this and understand its significance in the entire purchasing process.


Mortgage points and its types

The mortgage points are equivalent to one percent of the value of the mortgage. One point is equal to one percent. There are two basic types: the discount point and the origination points. The discount point influence how much mortgage rate the borrower will pay in the future. If he pays discount points during the closing, his mortgage rate will reduce. The more points the borrower pays, the lower the mortgage rate will get. One advantage of paying such point is that the payment made for this is tax deductible.

The origination point on the other hand is a type of point that represents the charges from lenders brought by the processing of the loan. The evaluation of the mortgage application and its approval are part of this. Origination points can vary from lender to lender. Some lenders do not charge this while others require high value for it.


Should you pay discount points?

This is the most asked question after understanding the mortgage points. In order to answer this, careful analysis should be done. Here are some tips help you make the right decision:

  1. Do you have the money to pay the points? Is it part of your budget? Before you can decide to pay the discount point, see to it that you can afford it. Bear in mind that discount points are not your priority when purchasing a house.

  2. How much will you save if you pay for the points? You will be able to determine this after you have computed the adjusted mortgage rate. How much will it cost you? Compare the cost with the monthly savings you will have in the future.

  3. When will you breakeven? In any investment, breaking even is crucial. This is to ascertain that you did not incur losses. This is the same with the discount points. At what point will you breakeven. Will your savings equal the payment for discount payments after five years? If so, it would be best that you live in that house for at least five years.

  4. How long do you plan to live in the house? If you are living there for the rest of your life, paying the discount point is a good idea. But, it would not be advisable if you will transfer in the next couple of years.

Applying for a mortgage loan is important. This is why you have to understand the terms associated with it. Mortgage point is just one. This points the charges related to the processing of you loan application. This also gives you the opportunity to reduce your mortgage rate. This makes it important that you are careful with the decisions you will make.
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