Points and origination fees are important charges to consider when mortgage refinancing. Paying one discount point upfront usually lowers your mortgage rate by ¼ percent. Is the trade-off worth forking over the cash for discount points at closing? Here are a several tips to help you understand mortgage points and decide if paying is worthwhile when mortgage refinancing.
One point, called in this case a “discount point” is one percent of your loan amount in the form of “pre-paid interest. ” Whether or not paying this fee is worthwhile depends how long you plan on keeping the mortgage. If you sell your home or refinance the loan before recouping your expenses, you’ve wasted your money by paying discount points.
Suppose you were refinancing a $225,000 mortgage with a 5.25%, fixed interest rate mortgage loan for 30 years, but have to pay one point to qualify. Your monthly payment after paying the $2,250 fee would be $35 lower because you paid this fee. With the $35 per month savings it will take you nearly 65 months, just over 5 years to recoup the expense.
The average homeowner in the United States refinances their mortgage every 5-7 years; how much more could you save by refinancing five years from now with higher income and better credit? For many homeowners paying discount points simply isn’t worthwhile when running the numbers. If you're rate shopping for a new mortgage, ask your loan representative for rate combinations with and without discount points. If you're not seeing a 1/4 point change in the mortgage interest rate or your loan representative will not budge on removing points from your quotes, find another mortgage lender.
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Home Mortgage Discount Points