When you get a mortgage, closing costs will be a significant cost that you need to consider. One type of closing cost that you may have to pay is mortgage points. Mortgage points are a type of pre-paid interest that can be included as part of the upfront money that you have to pay a mortgage lender in fees.
Mortgage Points 101
The basic idea behind mortgage points is that the lender is essentially getting some of its interest on the front end of the deal. The value of one point is one percent of the value of the loan. For example, if you were taking on a $200,000 mortgage, one point would be equal $2,000.
When you pay a mortgage point, or multiple points, the lender will give you a lower interest rate on the loan. This has the effect of lowering your monthly mortgage payment and reducing the amount of interest that you have to pay over the life of the mortgage.
In many cases, paying points on your home mortgage is voluntary. The lender will give you the option of paying points if you want to have a lower payment and a lower interest rate. However, you can usually decide to avoid paying points if you don’t have a large amount of cash that you can pay the closing costs with upfront.
The primary advantage of paying points is that you can get a cheaper payment to work with. If you have some money in savings and you’re worried about being able to afford your monthly mortgage payment, this can be a wise move to make. If you don’t have the cash, it’s probably best to avoid paying points and just let the mortgage lender get its interest over the life of the loan.
Another advantage of paying points is that it can give you a bigger tax deduction for the year. Any interest that you pay on a mortgage is tax deductible. This means that, since you’re paying interest for the mortgage on the front end, you’ll be able to deduct the entire amount that you pay in points.
Although paying points can help get you a better rate, it’s not always in your best interest. Sometimes a lender will require you to pay points in order to buy down your rate. If that’s the only way that you can get approved for a mortgage, you’ll have to come up with the cash somehow to get the loan.
Visit Paramount Equity® and talk to a Financial Specialist