Pros and Cons of Mortgage Points for Home Buyers
Don't pay for mortgage points until you read these advantages and disadvantages of loan discount points.
Are you weighing the pros and cons of mortgage points as you shop around and try to lock in the best mortgage to buy a new home in North Carolina or another state? Do you understand how mortgage points will affect your interest rate? Let’s take a look at these additional home loan fees and help you weigh the pros and cons of mortgage points so you can make the best decision before you finalize your new home purchase.
Mortgage Points – What Are They?
As defined in our basic mortgage terminology article, a point on a borrower’s home loan is a fee equal to 1 percent of the loan amount. Borrowers pay for points to reduce the interest rate on their home loan. These mortgage points come in two varieties: origination points and discount points.
Origination points cover the lender’s costs of making the loan. When shopping around for a lender, you will discover that not all lenders include an origination fee in your loan’s APR and most will negotiate this fee with you. On the other hand, discount points are prepaid interest on the loan and the purchase of each point will lower your interest rate and reduce your mortgage payments.
Should You Pay for Points?
Understanding your mortgage type and mortgage payment structure is key to understanding whether or not you should purchase discount points. Two major factors to consider when making a decision are how long you plan to live in the house and whether or not you have the money on hand to pay for mortgage discount points.
Generally speaking, the longer a borrower plans to stay in the home, the more beneficial mortgage points will be. Before paying for discount points, you must also understand how much money you have on hand for your down payment and closing costs. Discuss these two factors in detail with your lender to weigh your options as it may make more financial sense to pay a larger down payment (possibly avoiding PMI) or to avoid discount points if you plan to move in the next five or six years.
Other Reasons to Consider Mortgage Points
In a lending environment where market rates are high and may continue to rise, home buyers may want to pay for a point to lock in a lower rate on their mortgage. Are you looking to buy a North Carolina home in a specific school district, but the home prices are just out of reach? Buyers who pay points to secure a lower interest rate could borrow more, which may put that home in your price range.
What about the tax implications of mortgage points? Points paid to obtain a mortgage may be tax-deductible, but they are subject to various rules and limitations. Borrowers can read what the IRS thinks about home mortgage points here. If you are considering paying for points, make sure to have this discussion with your tax advisor before making a final decision.
As you can see, there are many pros and cons to mortgage points. Paying for discount points and receiving a lower interest rate or having the chance to qualify for a larger loan may seem like a no-brainer, but remember, it is not always advantageous to the borrower. In fact, purchasing points could do more harm than good depending on a number of variables. Savvy borrowers take their time when shopping around for a mortgage and investigate all their options before paying for discount points.
If you are starting to interview lenders and beginning your search to buy a new home in Raleigh, Chapel Hill or Durham, North Carolina, contact Red Door Company and put our proven experience and expertise to use in finding the perfect home at the perfect price.