Pros and Cons of Paying Points
Points, also known as discount points or origination points, are fees paid to the lender to secure a reduced interest rate for the life of the mortgage loan. Points are an optional fee that are beneficial to some buyers, especially those who will be living in the home long-term.
Points are calculated based on the total loan amount, each point represents a percentage of the mortgage loan. In some cases, paying points ahead of time can help the borrower secure a lower interest rate, reduce the monthly mortgage payment, and pay less overall throughout the life of the loan. Points may also be tax deductible.
Homebuyers planning to stay in the home for a long time may consider paying points, since it can take several years to recoup the cost. Before considering to pay or forgo points, the borrower should ask these questions:
- Can I afford to pay points?
- How many points will it take to reduce monthly payments?
- How much interest will I save over time? (Five years, ten years, fifteen years)
Before making any financial moves, the borrower should ask the lender for a calculation of how the monthly mortgage payment will be impacted by paying points. Most lenders can create an amortization table to show the reduction of interest costs and how paying points can benefit the borrower over time. For more information on a specific situation, contact a financial advisor.
Sources: The Balance, Ris Media