When you get a home loan, you may pay two different types of points: origination points and discount points. Each point is equivalent to 1 percent of your loan amount, so one point on a $150,000 mortgage is $1,500.
Always pay attention to advertised loan rates, as most show an interest rate based on the purchase of a certain number of discount points, which must be paid at closing.
If you have the option to pay discount points, there are two factors to consider before making your decision.
First, consider how long you plan to live in the house. The longer you stay, the more purchasing discount points will save you. You would need to remain in the home for 63 months to break even on this investment, or just over five years.
You should also consider how much cash you have to pay points. Many buyers struggle to afford their down payment and closing costs, so paying extra points is not always an option.
While some mortgage experts say that the cash you would spend on discount points should be used instead to invest in something with a better return, most homebuyers just want a home loan they can afford. Homeowners usually buy a home for pride of ownership and a stable place to live, not as an investment. After all, even if your home increases substantially in value, you will still need a place to live, and nearby homes will likely have gone up in price, too.
If you plan to live in your home for a long time and you want the lowest payment possible, buying mortgage points is often worth the cost.
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