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Should You Pay Points on a Mortgage Loan?

Current mortgage rates have declined to an average of about 5% for a 30-year mortgage, pushing some homeowners to refinance or apply for a new home loan. If you have a good credit score you’ll likely qualify for the best mortgage rates. But even if you don’t have that great of a score you can pay points on a loan to lower your mortgage costs.

What Are Points?

Each point equals 1% of the amount of your mortgage. So for a $250,000 mortgage  a point would be equal to $2,500. Depending upon the loan, you could choose to pay several points. How many points you pay usually depends upon things like how much of a down payment you have.

Types of Points

When you get mortgage rate quotes from mortgage lenders they may quote discount or origination points. In fact, many of the mortgage rates you see quoted in the newspaper or online include points. Let’s look at the difference between the two types of points.

Discount points are what you pay to lower your mortgage interest rate. The amount a mortgage rate is lowered can vary at different mortgage lenders but may be about 0.25% per point. You’ll pay the points at closing. Points are deductible on your income tax return if you meet certain Internal Revenue Service (IRS) requirements.

Origination points are for the cost of actually getting a mortgage. Not all mortgage lenders require origination points so you can probably find a home loan without them. Origination points also are not tax deductible, so you’ll need to decide if it’s really worth it to pay them.

Can You Afford to Pay Points?

Whether or not you choose to pay points usually comes down to a couple of things. First, how long do you plan to live in the home? The longer you stay, the more benefit you see from paying discount points. Use a mortgage points calculator to determine how long it will take to break even on paying points.

Mortgage Closing Costs

Second, do you actually have the cash to pay points at closing? The more expensive your mortgage loan, the more you pay for points. Depending upon the mortgage you could end up paying several thousands of dollars in addition to your down payment.

You can pay points when you do a mortgage refinance or purchase a new home. Begin comparing current mortgage rates to see if it makes sense to pay points on a home loan.

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One Response to “Should You Pay Points on a Mortgage Loan?”

  1. 10 Things to Consider about Doing a Mortgage Refinance | LoanBlog Says:

    […] California Mortgage Home >> News >> LoanBlog >> 10 Things to Consider about Doing a Mortgage Refinance « Should You Pay Points on a Mortgage Loan? […]

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