What are points, and how much do they cost?

"Points" or "Discount Points" are a type of prepaid interest you can pay upfront to lower the interest rate on your mortgage. One point equals 1% of the loan amount.

Example:

• 1 point on a $100,000 loan = $1,000.

Should You Pay Discount Points?

To decide if paying points is a good idea, calculate your break-even point. This is when the money you save from a lower interest rate equals the upfront cost of the points.

Example:

• On a $100,000 loan, paying 1 point reduces your interest rate by 0.25%, saving you $15.17 per month.
• Break-even calculation: $1,000 (cost of points) ÷ $15.17 (monthly savings) = 65.9 months.

If you plan to own the property beyond this break-even period, it may make sense to pay the points.

The Rest of the Equation

Points can be tax deductible in the year paid on purchase loans and over the life of the loan on refinances (always consult with your tax professional for advice). A lower real cost could shorten the break-even period.

Example:

• If you’re in the 28% tax bracket, a $1,000 point payment could have a real cost of $720.
• Break-even period: $720 ÷ $15.17 = 47.5 months.

The Risks of Paying Points

Once you've paid points, that money is spent. If you sell or refinance before reaching the break-even point, you could lose the value of those points.

Alternatives To Paying Points 

Increase Your Down Payment

• Adding more to your down payment will lower your loan balance and your monthly payment—without needing to reach a break-even point.
• Example: Borrowing $1,000 less on a 30-year loan at 5% saves you $5.37 per month.

Save The Money

Cash reserves sometimes prove more valuable than a slightly lower payment.

Bottom Line: Weighing Your Options 

When deciding whether to pay mortgage points, ask yourself:

• Are you a short-term or long-term homeowner?
• Do you prefer a lower monthly payment, more cash reserves, or more home equity?
• Will you likely refinance before reaching the break-even point?

Each option has its pros and cons, and the best choice depends on your personal situation. We’re here to help you evaluate your options and run the numbers.

Contact us today at 888-616-9885 or click here.