9/30/2022
The dynamics of mortgage loans in the United States has some peculiarities that make it attractive and complex at the same time. It does not mean that it is difficult to understand, but rather it includes several aspects that are worth knowing before applying for a mortgage.
In this category are the Mortgage Discount Points, which we will explain below.
What are mortgage points?
Mortgage Discount Points represent a single payment in advance for the bank or lender at the time of the mortgage loan agreement. The purpose of this installment is to obtain a lower or "discounted" interest rate to reduce monthly installments.
When given this option, this operation is also known as "buying down the rate". At the time of taking advantage of this resource, each point has a value of 1% of the total amount of the requested mortgage.
For example, if you ask for $150,000 dollars, the cost of the mentioned fee equals $1,500. In general, the financial institution can reduce the interest rate by 0.25% for each point, but this discount can be greater or less depending on the lender's policies.
- Interest: From 4.75% to 5.75%
- Max term: 30 años
- Interest: Consult
- Max term: 30 años
- Interest: First years fixed-rate and the rest adjustable: SOFR + margin
- Max term: 30 años
- Interest: SOFR + margin
- Max term: 30 años
- Interest: From 5.125%
- Max term: 30 años
On the other hand, you will not always have the opportunity to pay 1% or more. Sometimes the financial institution you have chosen might offer half a point (0.5), which in theory would translate into a 0.125% discount.
The opposite is also possible (maximum 3 points), which is why it is important to compare mortgages to have accurate information on these types of conditions.
Key facts about mortgage points
During the application for a mortgage, the bank gives you a quote divided into 2 parts: one indicates the interest rate and the other the number of points needed to obtain said percentage.
Logically, the more points you pay, the lower your rate will be. When you receive your settlement statement, the reduction appears as a “Discount fee” or a “Mortgage Rate Buydown”.
We also find it relevant to point out the following:
- These mortgage discount points are tax-deductible based on your IRS filing. While we encourage you to hire a tax professional, keep in mind that this is not the case with a refinance home loan.
- In the case of ARMs or adjustable-rate mortgages, the discount only applies during the fixed term of the loan. Depending on the bank you use, the interest rate may drop once the adjustment to the variable rate begins.
- Consider the down payment that you are going to give before buying the mortgage points. If you pay less than 20%, you may have to pay PMI (Personal Mortgage Insurance). So you need to calculate how this additional cost affects you compared to the interest advanced.
- Keep in mind that while the APR calculation is important, it can be detrimental when it comes to discount points. This is because it assumes that you are going to keep the mortgage for the agreed term (10, 15, 20 or 30 years). As this value does not consider the fact of maintaining the mortgage credit for less time, it is sometimes preferable to base it on the interest rate.
In what situation is it convenient to use mortgage points?
First of all, there are 2 factors that you must care about: whether you have enough money left over to pay them, and the time you plan to live in the home you want to buy.
May interest you: Citibank mortgage loans
The longer you live in the house or apartment, the greater the savings with the prepayment of interest.
A simple example looks like this:
- For a 30-year mortgage of $100,000 at 5% interest, you get a monthly payment of $537.
- If you buy 3 mortgage discount points, the rate would tentatively drop to 4.25%, putting the monthly payment at $492.
The purchase of the points in this example costs $3,000 and you get a savings of $45 per month. The time needed to stay in the home to get even or cover expenses, is 66 months or 5.5 years.
Since it is 360 months, using mortgage points is a smart option when you plan to be in the property for longer than the indicated time. If not, it is preferable not to do it.
Mortgage discount points are an interesting resource to reduce the final amount that you will end up paying for this loan. Of course, you must keep in mind some variables to be able to take advantage of them intelligently.
Meanwhile, you can use the Busconómico mortgage comparator to find the most attractive mortgage loans and make an informed decision based on accurate data.
Español: Puntos de descuento en una hipoteca, qué son y cómo usarlos