In conversations about mortgages, the term “points” may come up. Mortgage points are an up-front fee a homebuyer pays to the lender to get a lower interest rate over the life of the mortgage. Mortgage points are sometimes referred to as “discount points” because paying points gets the borrower a discount on the mortgage rate.
One point is equal to one percent (1%) of the mortgage amount ($1,000 for every $100,000). Your mortgage rate will be reduced by a set percentage point for each mortgage point you pay. The rate discount received per point varies by lender, but generally is about a quarter of a percent (.25%) interest rate reduction for each point paid.
Points are paid at the mortgage closing. The lender will calculate the cost of the points you agree to pay, and the amount is included with any other closing costs.
Why would you pay points?
You can decide whether you want to pay points on a mortgage or not. Some homebuyers prefer to lower the overall cost of their mortgage with discount points. Others find the added cost of paying mortgage points to be an extra burden with the other costs involved in buying a house.
It might make sense to pay points to lower your mortgage payments if you plan to own the home beyond the breakeven period to recoup the cost of the points.
To calculate the breakeven point of buying points, divide the up-front cost of the mortgage points by the dollar amount of monthly savings. The result is the number of months required to reach your breakeven point. Over a 30-year loan, the savings beyond the breakeven point can be significant.
Mortgage points could affect your tax situation, so make sure to consult a tax professional to determine the strategy that works best for you.
For information about mortgage programs offered by Enterprise Bank, visit https://www.enterprisebanking.com/personal/loans/mortgage or contact The Mortgage Center at Enterprise Bank at 877-671-2265.