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. 

 

 

 

Inflation declined in August, reaching its lowest level since February 2021 and setting the stage for an expected policy rate cut from the Fed.

Jobless claims rose marginally last week to 230K. The pace of layoffs remains low even as the labor market shows signs of cooling.

Wholesale prices showed a mild increase of 0.2% in August, reinforcing indications the inflation rate is returning to low pre-pandemic levels.

August’s shelter inflation rate was down from its 8.2% peak in March 2023, but the 0.5% monthly gain was the highest since early 2024.

As rates moved lower last week, total mortgage demand grew 1.4%. Purchase apps rose 2%, and refinances were up 1% for the week.

Homeowners are sitting on more than $32 trillion in home equity, an all-time high. The average owner has $214K in equity.

The Labor Department reports July job openings slumped to their lowest level since January 2021.

In another sign of a slowing labor market, companies added fewer new jobs in August than any month since the start of 2021, according to ADP.

However, the US services sector expanded at a modest pace for a 2nd month in August, though there are signs momentum is fading.

Mortgage refinance demand is 94% higher than a year ago. Purchase apps rose only 3% for the week and were 4% lower than a year ago.

Inventory of available single-family homes rose slightly to 704K last week, though the pace of growth has slowed.

August was the most affordable month for housing since February due to slower home price growth and lower rates, according to ICE.

Minutes from last month's Fed meeting showed most members felt a policy rate cut would be appropriate at the next meeting.

Markets are already fully pricing in a September cut, which would be the first since the emergency easing in the early days of the pandemic.

Unemployment applications barely rose last week. The 4-week average, which smooths out some volatility, fell to its lowest level in a month.

Fannie Mae economists say the recent decline in mortgage rates is not enough to increase the number of homes sold in the foreseeable future.

However, July home sales broke a 4-month losing streak as supply rose nearly 20% over last year. The NAR says home sales are still sluggish.

Fannie Mae is forecasting mortgage rates will average 6.4% by the end of this year and 5.9% by the end of 2025.