Discount points are fees you pay at closing in exchange for a reduced interest rate. You can think of points as a way of paying some interest up-front in exchange for a lower interest rate over the life of your loan. The longer you plan to own the home, the more points may help you save on interest over the life of the loan.
How are mortgage discount points calculated?
One point costs one percent of your loan amount (or $1,000 for every $100,000). Also, points don’t have to be round numbers either (1.25 points = $1,250 for every $100,000).
Are mortgage discount points tax deductible?
Yes, mortgage discount points are eligible for tax deductions but there are additional requirements you must meet from the IRS. Consult a tax advisor regarding tax implications and the deductibility of mortgage discount point fees.
Are mortgage discount points worth it?
It depends! First and foremost, it’s important to consider how long it will take to recoup the cost of the points that you’ve paid for. If you plan on staying in your home for a while, you are more likely to make up for the money you’ve spent on points. Finally, if your credit score isn’t high enough to qualify for a lower rate, mortgage discount points might make your monthly interest a little cheaper.
Let’s look at an example. If you pay one point on a $300,000 loan, this would be an up-front cost of $3,000. Let’s say this saves you $50 a month. It will take 60 months to recoup the cost of that point. If you refinance or sell the home before 60 months have passed, there wasn’t any benefit to paying the point.
Talk with a Loan Advisor
There's a lot to consider when it comes to points. We can help you understand all the details of a mortgage and choose the one that’s right for you. Contact one of our experienced Loan Advisors today. Visit our Get Started page or call us at 877-220-5533.
* Freedom Mortgage Corporation is not a financial advisor. The ideas outlined above are for informational purposes only, are not intended as investment or financial advice, and should not be construed as such. Consult a financial advisor before making important personal financial decisions, and consult a tax advisor regarding tax implications and the deductibility of mortgage interest and charges.