If you’ve begun to look for a mortgage, you might have heard or read about points. There are two types: origination and discount points. Understanding the difference between them can help you get the best possible terms on a home loan.
What You Should Know About Origination Points
When you apply for a mortgage, you’ll go through an origination process. The lender will evaluate your application and decide whether to approve your request for a loan. In exchange, you’ll have to pay fees. Origination points are a way for a lender to charge those fees. One origination point is equal to 1% of the amount borrowed.
Some lenders charge origination points, and others don’t. When a lender charges origination points, the number of points is negotiable.
Important Facts About Discount Points
Purchasing discount points can let you prepay interest, or buy down the interest rate, and reduce your monthly loan payments. Each discount point you buy will lower the interest rate on the mortgage by a fraction of a percentage point. The size of the reduction will depend on the lender. The more discount points you buy, the lower your interest rate will be. The interest rate will be reduced for as long as you have the loan.
The fee for a discount point is equal to 1% of the amount borrowed and is due at closing. Buying discount points might cost you thousands of dollars up front, but it can save you tens of thousands if you stay in your house for a long time.
Mortgage Points and Taxes
Origination points are not tax deductible, but discount points are. Consult a tax professional to discuss how purchasing discount points and itemizing your deductions could impact your tax liability.
How to Make a Decision
You’ll have to explore your options and do some math to figure out the best way to allocate your money. Divide the upfront cost for discount points by the amount you would save in interest each month to calculate the breakeven point.
If you intend to stay in the house for more than that length of time, buying discount points can save you money in the long run. If you plan to move or refinance in the not- too-distant future, the amount you would save by purchasing discount points might not be higher than what you would pay for points at closing. Sometimes, making a smaller down payment and buying discount points works out better. In other cases, making a larger down payment and borrowing a smaller amount makes more financial sense.
Remember that you’ll have a lot of other expenses to cover, such as moving fees, furniture and appliances. You should also have some money left over in case the house needs repairs after you move in. Look at the big picture and figure out which option will be best for you.
