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What Are Mortgage Points Anyway?

Kayla Gephart

by Kayla Gephart

Mortgage Points

Have you ever seen the term “mortgage points” or “points” when looking to purchase or refinance a home? If so, you are not alone. Many of the loan options on the market today give borrowers the option to pay points.

So, what exactly is a point? A point is calculated as a percentage of the loan amount and is considered pre-paid interest. Here’s an example. If you are trying to obtain a loan for $100,000 and there is an option to pay 1 point to lower your interest rate, you would be paying 1% of the loan amount as your point. In this case 1 point (1%) is $1,000.00.

Why in the world would you choose to pay extra money for a mortgage? The answer to this question is all too simple. You pay points to achieve a lower interest rate. If you pay $1,000 as suggested in the example, your interest rate may be reduced by .25%. A reduced rate would be beneficial for a borrower who knows they are going to live in the home for a long amount of time. They would benefit from paying a lower interest over time.

Example:

$100,000 loan amount for 30 years at 3.75% has the borrower paying $66,723 of interest over 30 years.

$100,000 loan amount for 30 years at 3.50% (paying 1 point) has the borrower paying $61,654 in interest over 30 years.

For $1,000 dollars upfront, the borrower saves $5,069.00 over the life of the loan.

It is important to remember that on the flip side, premium pricing can occur when a borrower takes a higher rate and receives a credit towards the closing costs of their loan in return. This is not a common practice but the situation does arise from time to time.

One final note on mortgage points: in many cases the points paid on your mortgage may be tax deductible! You will need to check with a tax professional for any deductions.

Disclaimer: You should not place undue reliance on any forward-looking statements.  These statements speak only as of the date of this blog article, even if subsequently made available by the Jersey Shore State Bank on its website or otherwise.  Jersey Shore State Bank undertakes no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this blog article.

Kayla Gephart

Kayla Gephart

Kayla Gephart has been a member of the Jersey Shore State Bank family for over 4 years. She currently works within the JSSB Mortgage Services division as a Xinnix Certified Originator.