How Can you Best Use Rate Points? | The Home Loan Expert
What are mortgage points? When closing on your loan, you have the option to purchase mortgage points, aka discount points or just “points.” One discount point is equal to 1% of your total loan amount. So, one discount point on a $400,000 loan would come out to $4,000.
With the right combination of mortgage points, you could set yourself up to save thousands by securing a lower interest rate on your loan. Keep in mind that discount points are paid upfront at the closing on top of your down payment and other costs. The Home Loan Expert is here to guide you on which mortgage points combination is the key to unlocking your financial savings.
How Do Mortgage Points Affect my Annual Percentage Rate?
Your Annual Percentage Rate (APR) tells you what it costs to borrow your loan each year. It is a more encompassing measurement compared to just your interest rate as it reflects other charges or fees such as mortgage insurance, most closing costs, discount points, and loan origination fees.
Each mortgage point purchased lowers your interest rate by 0.25%. This will lower your interest rate and APR as a result. To notice the benefits from your return on investment, there must be an adequate length of time to recover the upfront costs of your discount points by paying a lower monthly mortgage payment.
What is a Rebate?
Negative points are known as rebate points and are in essence the opposite of discount points. Your lender pays for them in exchange for you accepting a higher interest rate. With discount points, the longer you own your mortgage, the more savings you are able to benefit from. With a rebate, the converse is true: the longer you hold your mortgage, the more these will count against your savings objectives. Generally, points are a good investment if you hold the mortgage for 4 years or longer. Unless you are out of your loan within 2 years, negative rebate points become very costly.
How do I Use a Calculator to Determine my Optimal Discount Rate Points Combination?
With a discount points calculator, you can compare several loan options to see which monthly payment option offers the winning combination. You will need to provide information for the entry fields below to see how much you can save according to the loan type you choose:
- Mortgage Amount. This is the total amount for your mortgage loan, whether it’s a first-time purchase or a refinance.
- Mortgage Term. This is the period of time over which you will pay back your loan. Most loans are issued in increments of 15 or 30 years. Keep in mind that a shorter loan term will require more aggressive payments, which may mean a less noticeable recovery from your discount points purchase. However, it will also save you thousands of dollars otherwise spent on interest throughout the life of your loan. Longer terms offer more affordable monthly payments.
- Annual Interest Rate. This is the fee you pay to your lender for borrowing your loan. It is also the most impacted by a discount points purchase as it is lowered by 0.25 per discount point purchased.
- Discount Points. See how discount points will affect your monthly payments in relation to your mortgage rates and terms.
You can keep adjusting these inputs until you find a discount point combination that works best for your budgeting needs. Note that it is possible to buy a percentage of a discount point also but with less impact on your lowered interest rate.
Last, mortgage points have the same effect on an adjustable-rate mortgage (ARM) or fixed-rate mortgage. The main difference is you’ll need to be aware of your negotiated initial period (usually set at 5 or 7 years) to calculate your break-even point before buying points. Many homeowners with ARMs choose to refinance into a fixed-rate loan. This means you may not end up having the loan long enough to benefit from the lower rate you secured by paying points.
How Do I Know Which Points Combination is Right for Me?
The amount of time it takes to recover the cost of discount points varies depending on your interest rate, mortgage amount, and the number of discount points you pay.
You can use this chart as a reference when determining which points combination is right for you:
|Borrower is Income Short||Borrower is Cash Short|
|Borrower Expects to Have Mortgage 4 Years or Longer||1. Select High Fees, Low Rate||2. Select Rate at Zero Fees|
|Borrower Expects to Have Mortgage Less than 4 Years|| 3. Select Rate at Zero Fees||4. Select Negative Fees, High Rate|
Are Discount Points Tax Deductible?
Buying mortgage discount points is basically like paying off some of your interest earlier. Interest is tax deductible, and so are discount points on up to $750,000 of mortgage debt. During tax season, homeowners who claim a deduction for mortgage interest and discount points must list the deduction on Schedule A of Form 1040. Discount points cannot be deducted all in one year. Instead, they are deducted over the life of the loan.
How Can The Home Loan Expert Help?
Discount points are one of many factors that can affect your monthly payments. Having someone to guide you through the loan process can help you feel secure in coming up with a financial plan of action that suits your budgeting needs. The Home Loan Expert has been helping home buyers get the best deal possible on their loans for more than a decade.
Our team of friendly lending Experts comes from the same communities we serve, allowing for a personalized lending service that recognizes your individual needs. We work hard and fast to get your approval on your loan — with closing times in as little as two weeks.
Even with a calculator, finding the right combination of discount points can be challenging. Speaking with a knowledgeable lending Expert can provide you with a more concrete understanding of your monthly payments based on how many discount points you’re looking to apply to your loan. So give us a call at 866-221-1913 to find out more about which mortgage points combination, if any, can be used to better position yourself financially. We can also be reached through our online chat service to answer any outstanding questions.