Whether buying a pair of shoes, a phone, or even a pack of gum, we all try to find ways to save a few bucks. After all, we LOVE a good deal! So, when it comes to one of the most expensive purchases we'll ever make—a home—the urge to save a few bucks becomes even more intense. Luckily, there are countless ways to save money while buying an MLS listing Toronto.
In this blog, we’ll dive deep into one such strategy - “mortgage points.” Mortgage points are a kind of upfront payment you make to a lender to get a lower interest rate on your loan. Let’s learn more about this hack to get a sweeter mortgage deal in-depth below!
What Are Mortgage Points and What Types Are Available When Buying a Home?
As already mentioned, mortgage points are fees you pay to your lender at closing in exchange for a lower interest rate on your mortgage. Each point costs around 1% of the home loan amount. For instance, if you’re borrowing $20,000 to buy an MLS listing in Toronto, one mortgage point would cost about $2,000.
So, basically, mortgage points are like a little extra payment to get a better deal on the home loan. By paying these points upfront, you’re reducing your monthly mortgage payment and saving money over the life of your loan.
Here are the two main types of mortgage points you can get when buying a home -
Discount Points
Discount points are what we have talked about so far - it lowers the interest rate of your home loan. For every point you pay, you can lower your interest rate by almost 0.25%. So, if the current interest rate of your home loan is 4%, paying one point could bring the rate down to 3.75%. If you’re planning to stay in the Toronto home for a long time, these discount points can be a great deal.
Origination Points
Origination points will not lower the interest rate of the loan you’ll take for buying the MLS listing in Toronto. Instead, they are a way to cover the origination fees - expenses charged to you (homebuyer) by the lender to cover the cost of processing your loan. Origination points are usually 1% of the home loan amount just like discount points.
Pros and Cons of Using Mortgage Points When Buying a Home in Toronto
PROS
Lower Monthly Payments
One of the biggest advantages you’ll get with mortgage points is the chance to buy down your home loan interest rate. This means each month, you’ll be paying less in interest, making your payments more manageable and freeing up cash for other expenses or savings.
Long-Term Savings
While mortgage points require an upfront cost, they can save you a lot of money in the long run after you make the Toronto MLS listing yours. This is especially true if you plan to stay in your new home for a long time.
Tax Deductibility
In many cases, you can deduct the cost of mortgage points on your tax return in the year you pay them. This can reduce your taxable income and give you some extra cashback.
Predictable Costs
By buying mortgage points, you’re locking in a lower interest rate which provides predictability in your loan payments. This means you won’t have to worry about fluctuating interest rates affecting your monthly payments, giving you more stability in your budget.
Better Loan Terms
Sometimes, paying for mortgage points when buying an MLS listing in Toronto can help you qualify for better loan terms. Lenders might be more willing to offer you a lower interest rate if you’re willing to pay points upfront. This can be especially helpful to you if you have a smaller down payment or less-than-perfect credit score.
CONS
Upfront Cost
The biggest downside to mortgage points is the upfront cost - each point typically costs 1% of the loan amount. This can be a significant amount of money to come up with, especially if you’re already stretching your budget to cover a down payment and closing costs.
Break-Even Period
When you pay for mortgage points, you need to consider the break-even period - the amount of time it takes for your monthly savings to offset the upfront cost. In case you move or refinance before reaching this break-even point, you might not fully benefit from the lower interest rate.
Less Cash for Other Expenses
Paying for mortgage points means you’ll have less cash available for other important expenses when buying an MLS listing in Toronto. These costs could be for home repairs, furnishings, or even an emergency fund for homeownership expenses.
Not Always Available
Not all mortgage lenders offer the option to buy mortgage points on home loans.
Impact on Affordability
While lower monthly payments can be great, the upfront cost of mortgage points can impact your overall affordability. For many buyers, it might make more sense to put that money toward a larger down payment, which could help you qualify for a better loan or avoid private mortgage insurance (PMI).
The Final Verdict: When Should You Use Mortgage Points?
Using mortgage points is surely a smart move when buying an MLS listing in Toronto. However, it’s important to understand that you should use these mortgage points only if it makes sense for you.
We mean to say that if you plan to stay in your new home in Toronto for a long time then only you should buy mortgage points. By paying more upfront, you’ll lower your interest rate which means you’ll save a lot of money over the life of your loan. But if you’re not planning on staying in your home for more than a few years, mortgage points might not be worth it for you. This is because you might not recoup the upfront cost in the short time you own the home.
It’s also important to consider your home-buying budget when deciding on using mortgage points. If you can comfortably afford to buy mortgage points without stretching your finances too thin, mortgage points are worth considering. But in case your budget is already tight, it might be better to keep that money for other expenses involved in buying the Toronto MLS listing.
Remember, the goal is to make a home-buying decision that benefits you both now and down the line. So, take your time, do the math, and choose what’s best for your situation.
Read More:
- The Trade-Off: Should You Cash Out Investments to Buy a Home in Toronto?;
- Making Trade-offs: What to Compromise and Hold Firm on When Buying a Brampton Condo