Mortgage points are a type of fee that you pay upfront in order to lower your mortgage rate. One point is equal to 1% of the total loan amount. So if you’re taking out a $200,000 loan, one point would be $2,000. By paying points, you reduce the interest rate on the loan, resulting in a lower monthly payment.
Paying points makes sense for some people but not for others. For those who are planning to stay in their home for a long time, paying points can be a good option. Paying points can also be beneficial if you plan to pay off your loan quickly. The points are considered a pre-payment penalty and you will get the money back when you sell.
If you think you may move in a few years or can’t afford to pay the points upfront, it may not be worth it. This is because you won’t have enough time to recoup the cost of the points. Additionally, if you anticipate refinancing your loan in the future, the points may be a waste of money. Refinancing may allow you to secure a lower interest rate, which could make the points unnecessary.
Before you decide whether or not to pay points, you should consider all of the factors involved. You should compare the cost of the points to the amount of money you can save on your monthly payment. You should also weigh the expected length of time you’ll stay in your home, and the probability of refinancing in the future. This will help you determine if paying points is right for you.
In summary, paying points on a mortgage can be a smart way to save money in the long run, but it is important to understand what they are and how they work before making a decision. Mortgage points are a type of fee equal to 1% of the loan amount and by paying them upfront, you reduce the interest rate of the loan, resulting in a lower monthly payment. It makes sense to pay points if you plan to stay in the home for an extended period of time or to pay off the loan quickly, as you will receive the money back when you sell. However, if you don’t plan to stay in the home for long or anticipate refinancing in the future, the points may not be worth it as it won’t be enough time to recoup the cost. Ultimately, it is important to consider all of the factors involved before deciding whether or not to pay points.
This article was contributed on Aug 20, 2023
