What Are Mortgage Points?
Mortgage points, also known as discount points, are an opportunity to pay an extra amount of money during your mortgage closing period to reduce the interest rate of your home loan. While you don’t have to pay any mortgage points, lenders often give you the opportunity to pay mortgage points.
How Much Are Mortgage Points?
Each mortgage discount point costs 1% of the total amount of your home loan and typically reduces your interest rate between .125% and .25%. Using the .25% example, if you took out a $150,000 loan and had an interest rate of 5%, if you paid 2 mortgage points, you would pay $3,000 at closing for a reduced rate of 4.5%.*
If you have a fixed rate mortgage, this discount will be in effect for the full term of your mortgage. If you have an adjustable rate mortgage, it may only be in effect for the initial fixed rate-locked period. Talk to your Santander Bank loan officer for more information.
Should I buy mortgage points?
Mortgage points can save you money over time by lowering your interest rate, but it doesn’t always make sense to purchase them. First and foremost, it depends on how much cash you have available at the time of purchase. If you can make a full 20% down payment and closing costs with cash on hand available after closing, purchasing mortgage points may make sense. However, if you are planning to make a lower down payment, or if paying mortgage points would lower the amount you could put down on the house below 20%, the cost of private mortgage insurance would negate any benefits received from the interest rate discount.
You should also consider how long you will be living in the home to ensure that you will break even on the cost of the mortgage points. To calculate your break-even point, first determine the amount you will save each month with the lower interest rate. Then divide the total cost of mortgage points by the monthly savings. Your result will be the number of months before you break even. If you don’t plan on staying in your home until that time, you won’t be saving any money long term by purchasing mortgage points. For example, if you are saving $50 a month on interest payments by paying $3,000 up front for mortgage points, you should plan to stay in the home for at least 5 years to break even.
Are Mortgage Points Tax Deductible?
Discount points are a Schedule A tax deduction if you itemize your deductions. Talk to a tax advisor for more information.
What Are Negative Points?
In addition to mortgage discount points, there are also negative points, which serve the opposite purpose. You can request a negative point to help defray closing costs, with the penalty of paying a higher interest rate on your home loan over time.
Using the same example as before, this could mean that if you took 2 negative points, your lender would give you $3,000 on a $150,000 loan, but charge you an interest rate of 5.5% on your monthly payments.*
Regardless of where you are in the mortgage process, we will help you find a home loan that’s right for you. Click for additional information about the mortgage options Santander has to offer, to see if you pre-qualify or to find a Santander Mortgage Advisor near you.
All loans are subject to approval.
* This quote is subject to change by product and over time, based on market conditions.
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