Ever thought about buying mortgage points when you go to your lender to buy a home? You should. Buying mortgage points is a fantastic and easy way to reduce the total amount of interest paid to the bank over the life of a home loan. I have been involved in more than one deal where the buyer has purchased points, and does not regret it later. Among other things, buying mortgage points offers the following benefits:
- Points are tax deductible.
This has to be done on a depreciation schedule, but nonetheless, it is another item you can add to your itemization schedule for your taxes. This is above and beyond the deduction that you get for mortgage interest every year.
- Points cut down the interest rate you pay on a loan.
In the deal I have done, it seems that buying one point is about the equivalent of reducing your interest rate by about 1/4 of a percent. Thus, if you are quoted a rate of 6.5%, you would be buying it down to 6.25%. The banks have a formula on how they come up with the percentage equivalent of the point bought, so it vary depending on your lender.
- Often, points can be financed.
In other words, if you were to buy a point on a $100,000 loan, you can roll the cost of the point back into the loan, thereby increasing your loan amount to $101,000. I will explain in more detail in a moment.
Buying Mortgage Points Example
Now that I have covered some of the benefits of buying mortgage points, I would like to go through an example so you can see how this works in the real world. Let’s look at a $100,000 loan amount with two points (often banks will limit you to only 2 points – I guess because they will lose too much money if you buy more 🙂 ).
$100,000 * .02 = $2,000
Each “point” is priced at 1% of the loan amount. So in this case, it will cost you $2,000 to buy two points. So let’s see how that will affect your mortgage payment. Let’s say that you were approved for a 6.5% loan and the bank took 1/4 of a percent off the interest rate for each point.
PMT on $100,000 at 6.5% = $632.07 (Principle and interest only, based on a 30 year loan)
PMT on $100,000 at 6% = $599.55 (Again, principle and interest only, based on a 30 year loan)
So that is a difference of $32.52 per month, which is $11,707.20 over the life of the loan. Neat huh?
But what if you don’t have an extra $2,000 at closing to be able to pay for these points. Well, as I mentioned before, ask your lender about financing the points as well. If they did, here is what the principle and interest payments would like for the same 30 year loan amounts.
PMT on $100,000 at 6.5% = $632.07
PMT on $102,000 (adding in the $2,000 for buying 2 mortgage points) at 6% = $611.54
That is a difference of $20.53 per month, which is $7,390.80 over the life of the loan. Now you tell me, you spend no extra money at closing, and yet you still save $7,390.80 over the life of loan, would you do this? It seems like a no brainer to me.
This is the power and benefit you get when you buy mortgage points. I have worked on loans where we have done this, and it works. Be sure to read my follow up to buying mortgage points. Please leave any feedback or questions you have below.