When you’re offered a mortgage from a lender, you may have the opportunity to take advantage of discount fees or points. If you’re already finding the process of buying a home and obtaining a mortgage overwhelming, this idea might be confusing. Here’s what it means.
A discount fee – commonly called “points” – are an opportunity for you to prepay some of your mortgage interest in exchange for a reduced interest rate on your loan. The more points you pay, the lower your interest rate for the life of the loan.
Points typically cost about 1 percent of your mortgage, and each full point reduces your interest rate by about 0.25 percent. And, because it is considered a prepaid interest payment, what you pay in points is tax deductible.
Should you take advantage of points? And if so, how many?
The answers to these questions depend on how much cash you have available for closing and how long you’re planning to be in your home. If you are going to be in the home past the break-even point of buying discount points, taking advantage of the offer saves you money in the long run. This only works if you are in the home without refinancing; remember that a refinance is a brand-new loan.
If you aren’t planning to be in the home for that long, you probably want to keep more cash handy. You won’t gain anything by paying upfront for a lower mortgage rate. You’re not going to be with the home for the life of the loan.
