When you obtain a fixed mortgage, it is important to consider the things you can do to reduce what you pay overall. If you have the funds available, it might be beneficial for you to pay mortgage points in exchange for a lower interest rate. Although paying points means paying more money up-front, a lower interest rate can significantly reduce the overall cost of your loan. A lower interest rate leads to lower monthly payments, therefore saving you money on interest charges.
What Is a Mortgage Point?
First of all, you must understand what a mortgage point is. In general, one point is the equivalent of 1% of the home’s purchase price. If a home costs $200,000, then each point on your fixed mortgage is equal to $2,000. There are two main types of mortgage points:
- Origination points
- Discount points
For the most part, origination points are not particularly useful to homebuyers. These points are typically charged by the mortgage lender as part of your fixed mortgage origination fees and/or closing costs. Origination points do not lower your mortgage rate and rarely do they save you money.
Discount points, on the other hand, can save you money. If you decide to do so, you could pay discount points on your fixed mortgage. Discount points help lower your interest rate ― if you have an interest rate of 5.25% on a home that costs $200,000, you might be able to pay two points (equal to $4,000) and lower your mortgage rate to 4.75%. While this means you’ll need to come up with more money at closing time, locking-in a lower interest rate can save you thousands over the life of your fixed mortgage.
Another reason that borrowers choose to pay points on a fixed mortgage is that, in some cases, mortgage points are tax-deductible. Additionally, some homeowners are able to claim the mortgage interest tax deduction which can save even more money. You should double-check with a tax professional or the IRS before including these deductions on your tax return.
Is It Worthwhile to Pay Points on a Fixed Mortgage?
Whether or not paying mortgage points is worthwhile depends on your particular situation. If you want to lower your fixed mortgage payments and pay less interest overall, and you can afford to pay points, it may be a smart move. Paying points is also recommended if you plan on staying in your home for a long time.
However, if you think you’ll be moving in the next few years, you may not be in the home long enough for your fixed mortgage interest savings to overcome the cost of paying points. Carefully consider your break-even point to see which option works best for you.