Mortgage points help you get a better interest rate

If you’re planning to buy a new home and want to get a low interest rate from the lender, then you should try paying mortgage points. Mortgage point basically means paying a percentage of the loan to the lender at closing. One point equals to 1% of the loan amount and it generally lowers your interest rate by 0.125%. For fixed rate loans, the interest rate is reduced by 0.25% and for adjustable rate mortgages, rates are lowered by 0.375%. For example, if your loan amount is $200,000, and your rate of interest is 5%, then you can pay 1 point which is worth $2,000 and lower the interest rate on your mortgage.

Types of mortgage points

Mortgage points are of 2 types which are discussed below.

1. Discount points – The main advantage of paying discount points is to lower your interest rate significantly. This in turn reduces your monthly obligations on the mortgage loan. Discount points are tax deductible. Usually you can pay up to 4 points.

2. Origination points – These are fees which the lender charges you for originating your loan and for evaluating, processing, and approving the mortgage. Origination points are not tax deductible and do not offer any valuable benefits to the borrower.

Paying mortgage points can be beneficial if you are planning to live in the house for a long period, as the amount paid for the points cannot be recovered in a short period of time. Before paying the points, prioritize your requirements and if you have a more pressing need for cash to serve some other purpose, then you need not pay the points. It all depends on individual circumstances and also on the lender, as to whether you need to pay points.