Understanding Mortgage Points: When They’re Worth It
Mortgage points are a way for homebuyers to reduce their interest rate by paying an upfront fee at closing. Understanding when buying mortgage points makes financial sense can help homeowners like most of my clients in Wayne, Kinnelon, Riverdale, Montville, Pompton Plains, and Pequannock, NJ, save money over the life of their loan.
What Are Mortgage Points?
Mortgage points, also called discount points, are fees paid directly to the lender at closing in exchange for a lower interest rate. One point typically costs 1% of the loan amount. For example, on a $300,000 mortgage, one point would cost $3,000.
How Much Is 1 Point Worth in a Mortgage?
The value of one mortgage point depends on the lender and market conditions. Generally, each point reduces the interest rate by 0.25%. If a borrower’s initial rate is 6.5%, paying one point could lower it to 6.25%. Over the life of a 30-year loan, this can result in significant savings.
When Do Mortgage Points Make Financial Sense?
Paying for mortgage points is beneficial if:
The borrower plans to stay in the home long enough to break even on the upfront cost.
Interest rates are high, and locking in a lower rate provides long-term savings.
The homebuyer has extra funds available at closing and prefers lower monthly payments.
Using an online mortgage points calculator can help determine if the cost is worth the savings.
Do Points Go Toward the Principal?
Mortgage points do not reduce the principal balance of a loan. They strictly lower the interest rate, reducing the amount of interest paid over time. If a borrower wants to reduce the principal, they need to make additional payments toward the loan balance.
Are Mortgage Points Tax Deductible?
Mortgage points may be tax-deductible, but it depends on the circumstances. The IRS allows borrowers to deduct mortgage points in the year they were paid if the loan is for a primary residence. If the loan is for a refinance or second home, points are deducted over the life of the loan. Homebuyers should consult a tax professional to determine eligibility.
Deciding Whether to Buy Mortgage Points
The decision to buy mortgage points depends on personal financial goals. If a buyer plans to stay in their home for many years, the upfront cost can be a worthwhile investment. However, for those who expect to sell or refinance within a few years, keeping the cash for other expenses may be a better option.
Selling A Home or Thinking of Listing A Home?
If you’re thinking of selling your home or thinking of listing a home in Wayne NJ, Kinnelon NJ, Riverdale NJ, Montville NJ, Pompton Plains NJ, or Pequannock NJ, contact me to see how using RealVitalize® can enhance your home’s appeal and market value with ease.
Contact Me to Get Started
If you’re ready to sell your home or want to learn more about mortgage points, call or text me at (973) 476-1728. You can also email me at hello@1StopSteve.com.
About Stephen Tinney
Stephen Tinney, Owner of 1-Stop-Steve and Coldwell Banker Sales Agent
I help my clients sell homes in Wayne NJ, Kinnelon NJ, Riverdale NJ, Montville NJ, Pompton Plains NJ, or Pequannock NJ and surrounding areas. My goal is to make the real estate process simple and successful.
I’m both a licensed Real Estate Agent and Mortgage Broker. This allows me to guide clients through every step of buying or selling a home.