Points vs credits: their impact on your mortgage fees and monthly payments

Whether you are shopping for a mortgage or by exploring a refinance, you may have to deal with the point or credit issue. In short, points and credits are levers you can use to change your interest rate and closing costs. When you “take” points, you’ll pay less over the life of your loan, but you’ll pay more up front in closing costs. And when you “take” credit, you’ll pay less at closing in exchange for a higher interest rate and a higher overall loan cost. Bottom Line: If you plan to own the home for an extended period of time, taking mortgage points usually results in greater savings over the life of a loan, although the costs will be higher upfront.

Below, we detail the impact of points and credits on interest rates, monthly payments and the total cost of a loan.

What are mortgage points?

Mortgage points, also called discount points, reduce your interest rate in exchange for fees. Cost of mortgage points 1% of the mortgage amount and saves you 0.25% on your interest rate. If you buy or refinance a home with a $ 250,000 mortgage with an interest rate of 3.50%, a point mortgage would cost an additional $ 2,500 in closing costs, but lower your interest rate to 3.25. %. The lower interest rate allows you to benefit from a lower monthly payment and a lower total loan cost. Points can be purchased at closing (the final step in buying a home, marking the transfer of ownership from the property to the buyer), a process called “lowering the rate”.

Lenders usually allow you to purchase multiple discount points, but may limit the amount you can buy to lower your rate. If you buy mortgage points, you will find this information in both your loan estimate and your closing statement.

Advantages

• Allows you to save money in interest over the life of your loan
• Results in a lower monthly payment
• Can lower your tax bill, since mortgage points are tax deductible

The inconvenients

• Requires a higher upfront cost at a time when you are already spending a lot of money
• May not be profitable if you only own the house for a short time

What is a lender credit?

Just like mortgage points, lender credits allow you to adjust your interest rate and upfront costs. But instead of lowering your interest rate, they give you lower closing costs in exchange for a higher interest rate.

Lender credits are less standardized than mortgage points. As a result, the amount of a single loan increases your interest rate and reduces your closing costs will vary from lender to lender. In some cases, you may be able to use lender credits to completely eliminate your closing costs.

Just as lowering your interest rate with mortgage points also lowers your monthly payment, increasing your interest rate with lender credits also increases your monthly payment. Like mortgage points, you can find information about your lender credits in your loan estimate or closing statement.

Advantages

• Reduces your closing costs, which can remove a barrier to homeownership
• Can free up money for a larger down payment, home repairs and more
• Results in a larger annual tax deduction for your mortgage interest

The inconvenients

• Results in a higher interest rate and potentially more money paid in the long run
• Increase your monthly payment, which will reduce the money left in your budget
• The higher monthly payment could impact your debt ratio and make it more difficult to approve a loan

Choose between points and credits

Mortgage points and lender credits save you money, but in different ways. Mortgage Points allow you to lower your interest rate by paying more in closing costs. Generally, if you plan to own the home for an extended period of time, mortgage points will save you more.

Lender credits allow you to save money in the short term in exchange for a higher interest rate. This option frees up cash, which can help you put down a larger down payment, pay for home improvements and more.

Mortgage Points are best for borrowers who can afford a higher upfront cost, but want to save money in the long run. Lender credits, on the other hand, are best for borrowers who prefer a lower initial cost, and they can result in greater savings if you plan to own the home for a short period of time. With the high cost of buying a home, between down payment and closing costs, lender credits can help lower the barrier to entry, making home ownership more affordable and accessible. .

In either case, it’s equally important to consider your short-term and long-term financial goals and determine whether the immediate increase in liquidity that lender credits provide or the long-term savings that mortgage points provide are. most important to help you achieve these goals.

If you are wondering what will result in the most savings in the long run, the key is to find your breakeven point. In the case of mortgage points, the breakeven point is the time it would take you to own the home before the higher initial cost pays off and you start saving money. In the case of lender loans, the breakeven point is when your initial savings were offset by the higher interest rate.

The breakeven point: mortgage points

Suppose you buy a house with a mortgage of $ 300,000 and the lender offers you an interest rate of 3.50%. Wondering if mortgage points could help you save money.

Redeeming your rate with one and two point mortgage would allow you to break even and start saving after about six years. As long as you plan to own the home for at least that time, you’ll likely save money.

The difference between a one-point mortgage rate cut and two is that when you buy two-point mortgage, your savings on your entire 30-year mortgage are roughly twice as much.

The breakeven point: lending loans

Let’s look at a similar example using the same mortgage of $ 300,000 and the same interest rate of 3.50%, but with lender credits instead of mortgage points.

In this scenario, loans from lenders have a similar breakeven point to mortgage points. The difference is that with mortgage points, you start saving after about six years. But in the case of lender loans, you stop saving after about six years.

So, as long as you plan to own your home for less than the break-even period, lender loans can be profitable for you.

Calculate points for credits online

Using an online calculator can help you determine the impact of mortgage points and lender credits on your home buying process and your monthly payment. The information you get from these calculators could help you decide which one is best for you.

For example, Bankrate offers a mortgage payment calculator to help you determine your mortgage payment with and without points so you can compare. This calculator can help you figure out how much you’ll save over the time you plan to own the home. (Disclosure: Bankrate and CNET are both owned by Red Ventures.)

Since lender loans are not as standardized, there are fewer tools online to help you calculate their profitability. That being said, your lender can give you an estimate of the amount of lender credits that will increase your interest rate and lower your closing costs so that you can calculate the long-term effects.

Ultimately, deciding whether to use points or credits is a personal decision and will depend on your financial situation. You can discuss your options with your mortgage lender, who can explain how each option would affect your upfront costs and monthly mortgage payments. You can also consult a mortgage broker for a more unbiased opinion.