How does mortgage points work - tradeprofinances.com

How does mortgage points work

## Mortgage Points: An In-Depth Guide

### Introduction

Mortgage points, also known as discount points or loan origination fees, are a type of upfront payment that can be made at the closing of a mortgage loan to reduce the interest rate on the loan. One point is equal to 1% of the loan amount. For example, if you have a $200,000 mortgage, one point would cost you $2,000.

### How Mortgage Points Work

When you pay mortgage points, you are essentially prepaying some of the interest that would have been charged over the life of the loan. In return, the lender reduces the interest rate on your loan. The amount of interest that you save each month depends on the number of points that you pay and the interest rate on your loan.

For example, let’s say you have a $200,000 mortgage with a 4% interest rate. If you pay one point, your interest rate will be reduced to 3.9%. This will save you $20 per month on your mortgage payments.

### How to Determine if Mortgage Points Are Worth It

Whether or not mortgage points are worth it for you depends on a number of factors, including:

* **The length of time that you plan to keep the loan.** If you plan to sell your home or refinance your mortgage in the near future, then paying mortgage points may not be worth it.
* **Your financial situation.** If you have a large amount of cash on hand, then paying mortgage points may be a good way to save money on your monthly payments. However, if you are short on cash, then you may want to consider other options, such as a lower interest rate loan or a loan with no closing costs.
* **The interest rate environment.** If interest rates are low, then paying mortgage points may not be worth it. However, if interest rates are high, then paying mortgage points could save you a significant amount of money over the life of your loan.

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### Calculating the Break-Even Point

To determine if mortgage points are worth it for you, you need to calculate the break-even point. This is the point at which the amount of money that you save on interest payments will equal the amount of money that you paid for the points.

To calculate the break-even point, you can use the following formula:

“`
Break-even point = (Loan amount x Points paid) / Monthly interest savings
“`

For example, let’s say you have a $200,000 mortgage with a 4% interest rate. If you pay one point, your interest rate will be reduced to 3.9%. This will save you $20 per month on your mortgage payments.

Using the formula above, we can calculate the break-even point as follows:

“`
Break-even point = ($200,000 x 1) / $20 = 10,000 months
“`

This means that it will take approximately 83 years to break even on the cost of the points. If you plan to sell your home or refinance your mortgage before this time, then paying mortgage points may not be worth it for you.

### Pros and Cons of Mortgage Points

**Pros:**

* Can reduce the interest rate on your mortgage
* Can save you money on your monthly payments
* Can help you qualify for a larger loan amount

**Cons:**

* Can be expensive
* May not be worth it if you plan to sell your home or refinance your mortgage in the near future
* May not be a good option if you are short on cash

### Other Ways to Reduce Your Mortgage Costs

If you are looking for ways to reduce your mortgage costs, there are a number of other options available to you, including:

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* **Shopping around for a better interest rate.** This is one of the most important things that you can do to save money on your mortgage. By comparing rates from multiple lenders, you can ensure that you are getting the best deal possible.
* **Getting a loan with no closing costs.** This can save you a significant amount of money upfront. However, keep in mind that lenders often charge a higher interest rate on loans with no closing costs.
* **Making extra payments on your mortgage.** This can help you pay off your loan faster and save money on interest.
* **Refinancing your mortgage.** This can be a good option if interest rates have declined since you first took out your mortgage. By refinancing, you can get a lower interest rate and save money on your monthly payments.

### Conclusion

Mortgage points can be a good way to reduce the interest rate on your mortgage and save money on your monthly payments. However, it is important to weigh the pros and cons carefully before deciding if points are right for you. If you are not sure if points are worth it, you should talk to a mortgage lender who can help you make the best decision for your individual situation.

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