What Is Buying Down Points on a Mortgage?
"Buying down points on a mortgage" refers to whether a customer should incur additional costs to make a mortgage more favorable or feasible. Buying down points often can improve mortgage terms, such as by lowering an interest rate and monthly payments over the life of the loan.
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Definition
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A mortgage "point" is defined as 1 percent of the total loan amount borrowed; for example, a point on a $227,000 mortgage would be $2,270.00. Sometimes points are called "origination" or "discount" points.
Function
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A mortgage lender or broker may charge a point or a portion of a point for a lower interest rate over the life of the loan. The more points paid, the lower the interest rate. The ratio is approximately 1 point per quarter or half a percentage point in the interest rate.
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Considerations
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Buying down points adds to a mortgage's overall closing costs, and is generally not worth it unless, according to Mtgprofessor.com, it "can be viewed as an investment that yields a return that rises the longer you stay in your house."
Identification
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To determine whether or not a lender has charged mortgage points, look at the first line item on a good faith estimate. Points will show as percentages of the loan amount going towards a mortgage broker or lender.
Benefits
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According to 1040.com, when a borrower has paid mortgage points in the home-buying process, he may be able to claim the points paid as an itemized deduction for that tax year.
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References
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