Mortgage Points
Mortgage points are a frequently used and a popular phenomenon in the United States. It is the only country around the world currently using mortgage points. One mortgage point is equal to one percent of the loan amount. Negative points refer to rebates from the lender to the borrower. The borrower can use these negative points to offset monthly payments or closing costs as they see fit. However negative points cannot be used to offset (a component of) the down payment. Low interest rates are usually combined with mortgage point and high interest rates are combined with negative points. Most mortgage companies offer a wide range of combinations of mortgage points and interest rates leaving it to customers to choose a combination best suited to their distinct needs. Low interest rate loans combined with mortgage points are usually suitable for customers seeking to reduce their monthly payments, having an unusually long term horizon or excess cash to buy them. On the contrary high interest rate loans with negative points are more appropriate for people do not have excess cash to spare and do not expect to live in their houses for a very long period of time. It is hard and takes thorough research to find negative point mortgage loans that do not squeeze you for what you are worth. The heart of the problem is that most mortgage loan companies provide information on negative point mortgage loans to independent mortgage brokers and their own employees but not to customers. Both see negative point mortgage loans as an opportunity to charge unusual commission from the buyer. Buyers thus do not have the required information and tend to be wary of negative point mortgage loans trying their best to avoid them.
There are two basic types of mortgage points viz. discount points and origination points. Discount points refer to prepaid interest on the mortgage loan. More discount points you buy lower will be the interest rate on your loan. Origination points refer to the loan application fees charged by the lender. Origination fees is deductible only if it was used to obtain a mortgage and not to pay other closing costs such as attorney’s fees, mortgage application fees, appraisal fees, inspection fees, recording fees, underwriting fees and home warranties etc. The feasibility of buying mortgage points depends on a number of factors that are distinct for each individual such as how much extra cash you have at mortgage closing, how long you plan to live in the house, what amount of monthly payments you want to make and what interest rate you are willing to pay etc. Thus there is no one right answer that fits all circumstances when it comes to the decision to buy mortgage points. Buying mortgage points lowers your interest rate because you pay in lump sum rather than paying over a long period of time. A question that concerns most people is that how much does one discount point lower the interest rate on your mortgage? Although it varies on each individual loan one-discount point bought on a 30-year loan typically lowers the interest rate by 0.125 percent. Discount points are tax deductible for the year in which they are paid.
The advantages and disadvantage of buying mortgage points depend on each individual loan and may vary from case to case depending on financial standing and credit history of the buyer. A major advantage of discount points is that they are income tax deductible. However, in case of mortgage refinancing the deduction might not be allowed or the year in which the mortgage points are paid. Another advantage of mortgage points is that they reduce interest rate of the overall mortgage loan positively impacting monthly mortgage payments. Along with these advantages mortgage points also have a number of disadvantages. A disadvantage of buying mortgage points is that they add to the upfront costs of buying a house and may not be affordable for a vast majority of people. If you are forced to sell your home after a short period of time you will not be able to recover the payments you made for mortgage points. As mentioned above mortgage points are unknown in the United Kingdom and the rest of the world and are only used in Unites States.
Another misconception that most buyers have is that they have to buy mortgage points in any case. In reality however this could not be further from reality. Almost all lenders are willing to make no mortgage point loans as per the buyers’ needs. Although interest rates on these no mortgage point loans will obviously be higher than loans with which mortgage points are bought. Also be aware of mortgage point scams! Mortgage companies tend to include points with other costs in no mortgage point loans as well. This is an unethical practice and you should make sure you are not paying mortgage points if you chose not to. Mortgage points can also be financed from the mortgage company. However this will be of little or no benefit to the buyer until he/she is in a low income tax bracket and can earn higher return on cash. A simple way to assess the feasibility of mortgage points for your loan is calculating breakeven in months. This value tells you the number of months you must keep the mortgage loan to breakeven the amount you paid on mortgage points. Breakeven in months is calculated as follows; calculate your monthly payments on the interest rate you will be charged if you do and do not purchase mortgage points; subtract the lower monthly payment from the higher one to ascertain monthly savings; now divide your total closing costs by monthly savings to get the number of months you will need to break even your mortgage point payment. Breakeven point of mortgage points should always be calculated before buying them.