An NJ Home Mortgage: “A Point or Not a Point – That is the Question?”

Purchasing a house and acquiring an NJ home mortgage is a complex and stressful transaction. There are numerous factors that need to be considered; mortgage points are one of those elements that are often difficult to understand. The purpose of this short article will be to clarify the concept of a ‘point’ and how it applies to an NJ home mortgage.

What is a NJ Home Mortgage ‘Point?’

Points are a form of pre-paid interest. Generally, one point equals one percent of the NJ home mortgage loan amount. So what does this actually mean? If the NJ home mortgage lender charges you points, the lender effectively increases the yield on the loan above the amount of the stated interest rate. In addition, borrowers can offer to pay a NJ home mortgage lender points as a method to reduce the interest rate of the loan. In effect, this will lower the monthly payment in exchange for more up-front monies. A general guideline is that for each point purchased, the NJ home mortgage loan rate is reduced by about 1/8%.

Two Different Types of NJ Home Mortgage Points

1. Origination Points: These types of points are used to compensate loan officers. Not all NJ home mortgage providers require the payment of origination points, and those that do are often willing to negotiate the fee. It is important to note that origination points are not tax deductible.
2. Discount Points: These types of points are truly prepaid interest. The purchase of each point generally lowers the interest rate on your mortgage. Most NJ home mortgage lenders provide the opportunity to purchase anywhere from zero to three discount points. These types of points are tax deductible.

Should You Pay For Points on Your NJ Home Mortgage?

The decision to pay for points mostly focuses on the second type of mortgage point mentioned: discount points. When you are considering this option when purchasing your NJ home mortgage, there are two crucial factors to consider.

1. Length of time in house: In general, the longer you plan to live in your house, the bigger the savings is if you purchase discount points. For example:
   1. You have a $100,000 NJ home mortgage with an interest rate of 6%. Your total monthly payment (principal + interest) is $599.55/month.
   2. Purchasing three discount points would lower your interest rate to 5.25% and your monthly payment would now total $552.20/month.
   3. The three discount points cost you $3,000 in exchange for a savings of $47.35/month. In order for this transaction to be in your favor, you will need to live in the house for 63 months (just over 5 years).
2. Do you have enough money to purchase discount points? Most people are just about able to afford the down payment and closing costs of their NJ home mortgage, so buying points just isn’t a viable option.
   1. Using the 100,000 home example, three discount points are relatively affordable, but lets say the home is $500,000, than three points will cost approximately $15,000.
   2. Using this example, putting 20% down on a $500,000 home with an additional 15, 000 for discount points – just doesn’t seem like a “discount” anymore.