Q: Formula:

$\text{Cost of Points} = \text{Loan Amount} \times \left( \frac{\text{Number of Points}}{100} \right)$

Q: Formula:

$M = P \times \frac{r(1+r)^n}{(1+r)^n - 1}$

Q: Formula:

$\text{Breakeven (in months)} = \frac{\text{Cost of Points}}{\text{Monthly Payment at Par Rate} - \text{Monthly Payment at Discounted Rate}}$

Q: 1. Calculate the Cost of the Points:

The borrower is buying 2 points on a $450,000 loan. $\text{Cost} = $450,000 \times (2 / 100) = $9,000$. The borrower must bring an extra $9,000 in cash to the closing table.

Question 1

Formula:

Accepted Answer

$	ext{Cost of Points} = 	ext{Loan Amount} 	imes \left( \frac{	ext{Number of Points}}{100} ight)$

Question 2

Formula:

Accepted Answer

$M = P 	imes \frac{r(1+r)^n}{(1+r)^n - 1}$

Question 3

Formula:

Accepted Answer

$	ext{Breakeven (in months)} = \frac{	ext{Cost of Points}}{	ext{Monthly Payment at Par Rate} - 	ext{Monthly Payment at Discounted Rate}}$

Question 4

1. Calculate the Cost of the Points:

Accepted Answer

The borrower is buying 2 points on a $450,000 loan.
$	ext{Cost} = $450,000 	imes (2 / 100) = $9,000$.
The borrower must bring an extra $9,000 in cash to the closing table.

Question 5

Are mortgage points tax-deductible?

Accepted Answer

Yes, but the rules are highly specific and strictly enforced by the IRS. If you purchase discount points to buy or build your primary residence, and the points are computed as a percentage of the loan amount, the entire cost is generally fully deductible on Schedule A (Form 1040) in the year you pay them. However, you must itemize your deductions to claim this benefit. Since the Tax Cuts and Jobs Act of 2017 massively increased the standard deduction, the vast majority of taxpayers no longer itemize, rendering the tax deductibility of points completely useless for most modern borrowers.

Question 6

Can I finance the cost of mortgage points into the loan?

Accepted Answer

On a standard home purchase transaction, no. The cost of discount points must be paid in cash at the closing table as part of your total "cash to close." However, on a mortgage refinance, you are frequently allowed to roll the cost of the points into the new loan balance, provided you have sufficient equity in the home. This is known as a "no out-of-pocket" refinance. While convenient, financing points means you are paying interest on the points themselves for 30 years, which severely dilutes the mathematical benefit of the lower rate.

Question 7

Do mortgage points reduce the principal balance of my loan?

Accepted Answer

Absolutely not. This is a critical distinction. Paying $5,000 for discount points does not reduce your loan amount by $5,000. The principal balance remains exactly the same. The points solely alter the percentage rate used to calculate the interest applied to that principal balance. If you want to reduce the principal balance, you must apply that cash toward your down payment or make a curtailment payment directly against the principal after closing.

Question 8

Are mortgage points negotiable with the lender?

Accepted Answer

The mathematical cost of the points themselves (e.g., 1 point = 1% of the loan) is a rigid mathematical fact and cannot be negotiated. However, the yield—how much the interest rate drops per point—is highly negotiable and varies wildly between lenders. One bank might offer a 0.25% rate drop for 1 point, while a competing mortgage broker might offer a 0.375% rate drop for the exact same point. Borrowers should always obtain Loan Estimates from at least three different lenders on the exact same day to compare point pricing matrices.

Question 9

Is it possible to buy points on FHA or VA loans?

Accepted Answer

Yes, discount points can be purchased on virtually all loan types, including conventional, FHA, VA, and USDA loans. In fact, VA loans frequently feature highly attractive point pricing. However, borrowers must be careful not to confuse discount points with the mandatory upfront funding fees associated with government loans. The VA Funding Fee and the FHA Upfront Mortgage Insurance Premium (UFMIP) are separate, mandatory costs calculated as a percentage of the loan amount, and paying them does nothing to lower your interest rate.

Question 10

What happens to my points if I sell the house or refinance early?

Accepted Answer

The money is permanently gone. Discount points are a non-refundable, upfront fee paid to the lender to secure the lower rate. If you pay $8,000 for points on a 30-year mortgage, and then sell the home or refinance the loan six months later, the lender keeps the entire $8,000. There is no prorated refund. This exact scenario is why calculating the precise mathematical breakeven horizon—and being brutally honest about your future life plans—is the single most important step before purchasing mortgage points.

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