When you take out a mortgage to buy a home, you’ll be faced with a lot of choices. One of those choices is whether to pay mortgage points or not. Mortgage points are a type of fee that you can pay to your lender at closing in exchange for a lower interest rate on your mortgage. But is it worth it to pay mortgage points? In this article, we’ll explore the pros and cons of paying mortgage points, so you can make an informed decision.
What are Mortgage Points?
Mortgage points, also known as discount points, are a type of fee that you can pay to your lender at closing. Each point you pay typically costs 1% of the total amount of your mortgage. In exchange for paying this fee, your lender will lower your interest rate by a certain amount, usually 0.25% per point.
For example, let’s say you’re taking out a $300,000 mortgage with an interest rate of 4%. If you decide to pay one point at closing, it will cost you $3,000. In exchange for paying that fee, your lender will lower your interest rate by 0.25% to 3.75%.
Pros of Paying Mortgage Points
- Lower Monthly Payments
One of the main benefits of paying mortgage points is that it can lower your monthly mortgage payments. Since your interest rate will be lower, you’ll pay less interest each month, which means your monthly payments will be lower. Over the life of your loan, this can add up to significant savings.
- Save Money in the Long Run
Paying mortgage points can also save you money in the long run. While it may seem like a large expense upfront, the money you save on interest over the life of your loan can be significant. For example, if you pay two points on a $300,000 mortgage, you’ll pay $6,000 upfront. However, you could save over $30,000 in interest over the life of your loan, depending on your interest rate and the length of your loan.
- Tax Deductible
In some cases, paying mortgage points may be tax deductible. If you itemize your deductions on your tax return, you can deduct the cost of the points as mortgage interest. However, there are some restrictions, so it’s important to talk to a tax professional to determine if you’re eligible for this deduction.
Cons of Paying Mortgage Points
- High Upfront Costs
One of the biggest downsides of paying mortgage points is the high upfront costs. Since each point costs 1% of your mortgage, it can add up quickly. If you’re already strapped for cash, paying mortgage points may not be feasible.
- Longer Break-Even Point
Paying mortgage points can also mean a longer break-even point. The break-even point is achieved when the savings on interest from paying points cover the cost of the points. This point may take several years to reach, depending on the amount paid in points and the savings on interest.
- No Guarantee of Future Savings
Finally, it’s important to remember that paying mortgage points is not a guarantee of future savings. While it’s true that you can save money on interest over the life of your loan, there’s no way to predict what interest rates will do in the future. If interest rates drop significantly, the money you paid in points may not be worth it.
So, is it worth it to pay mortgage points? The answer depends on your individual situation. Paying points upfront and staying in your home long-term can be financially wise if you have the funds available. Yet, paying points may not be the optimal decision if you are short on cash or unsure of your long-term plans for your home.
To decide whether to pay mortgage points, analyze your finances and goals. Weigh the upfront costs, potential savings over the loan’s life, and how long you plan to stay in your home. By weighing the pros and cons, you can make an informed decision that’s right for you.