Are you seeing “points” on your Loan Estimate and wondering if they are worth it? You are not alone. Many Little Ferry buyers ask whether paying upfront to lower the rate will actually save money. In this guide, you will learn what mortgage points and lender credits are, how to run a simple breakeven check, and the key factors to consider in Bergen County. Let’s dive in.
Mortgage points, simply explained
Discount points
Discount points are prepaid fees you pay at closing to lower your mortgage interest rate. One point costs 1 percent of the loan amount. For example, 1 point on a $300,000 loan is $3,000. Paying points usually reduces the rate for the life of a fixed-rate loan. The exact rate drop per point depends on the lender and the loan program.
Lender credits
Lender credits are the opposite of points. You accept a higher interest rate and the lender gives you a credit to reduce cash needed at closing. Larger credits mean a bigger rate increase. Like points, pricing is lender specific and depends on the loan type and market.
Where you will see points
Points appear as line items on your Loan Estimate and Closing Disclosure. If you pay points, they increase your cash to close and are included in your APR. APR reflects upfront fees like points, which makes it helpful when you compare offers that structure points and credits differently.
How points change your payment
The basic math
- Cost of 1 point equals 1 percent of your loan amount.
- Monthly savings depend on how much the rate falls and your loan term.
- Breakeven months equals cost of points divided by monthly payment savings.
A quick example
Consider a $400,000 loan. If 1 point costs $4,000 and lowers your principal and interest payment by $75 per month, your breakeven is about 53 months. That is a little over 4 years. If you expect to live in the home longer than that, paying the point could save you money over time. If you plan to move or refinance earlier, you likely will not recoup the cost.
Use APR the right way
APR includes points and other upfront fees, so it helps when comparing different structures. It does not predict future choices like refinancing. Use APR to compare quotes, then rely on your breakeven math for your personal timeline.
When buying points makes sense
Your holding period and refinance plans
If you expect to stay in your Little Ferry home longer than the breakeven period, points can pay off. If you might sell or refinance sooner, paying points is usually not helpful. This is especially true if you think rates could drop and you would refinance before you break even.
Loan amount and cash to close
Bigger loans raise the dollar cost of each point but can also increase monthly savings when the rate falls. That can shorten breakeven. Balance that with your cash at closing. Buying points uses cash you might want for your down payment, reserves, or early home projects.
Taxes and loan program rules
Points on a purchase of a primary home can be deductible as mortgage interest in the year paid if IRS conditions are met. Points on a refinance are generally deducted over the life of the loan. Rules vary, so speak with a tax professional. FHA, VA and other programs also have rules on allowable points and seller contributions. Confirm details with your lender.
Local factors in Bergen County
Turnover patterns and commuting plans matter. If you expect a shorter stay, be conservative with points. Also consider full monthly housing costs in Bergen County. Property taxes and insurance affect your budget and your comfort with cash at closing. The right choice balances long-term savings with financial flexibility in year one.
A simple decision checklist
- Confirm your likely time in the home in years. Compare it with the breakeven months.
- Ask at least 2 to 3 lenders for side-by-side quotes that show rates with no points, with 1 point, and with credits.
- For each option, calculate monthly savings and breakeven. Model 3, 5, 7 and 10 years.
- Compare APR across the options to see the effect of points and fees.
- Review cash to close and reserves. Do not leave yourself short on savings.
- Check your loan program rules for allowable points and any seller-paid contributions.
- Ask a tax pro how points would be treated in your situation.
- Consider alternatives. You can request a lender credit, make a larger down payment, choose a shorter term, or plan principal prepayments.
Little Ferry buyer scenarios
Scenario 1: Planning to stay long term
You are buying a home and plan to stay 7 to 10 years. Using the example above, one point on a $400,000 loan costs $4,000 and saves $75 per month. You would break even in about 53 months. Since your expected stay is longer than breakeven, points could make sense if the cash at closing still leaves you comfortable.
Scenario 2: Unsure about the next few years
You think you might relocate for work in 2 to 3 years. In that case, a small lender credit could help reduce cash to close while accepting a slightly higher rate. That can keep more savings in your pocket for moving costs or an emergency fund.
Tips for shopping lenders in North Jersey
- Request a rate sheet that shows the interest rate across several point and credit options. Make sure you get a Loan Estimate for each.
- Ask for the APR and the exact dollar cost or credit for each option.
- Confirm how long the rate is locked and whether the pricing changes if the market moves.
- Ask how your credit score, loan-to-value, and loan size affect the point-to-rate tradeoff.
- Keep records so you can make apples-to-apples comparisons.
Common pitfalls to avoid
- Guessing about the breakeven instead of doing the simple math.
- Paying points when you are likely to refinance before breakeven.
- Using all your cash at closing and leaving yourself with thin reserves.
- Assuming points are deductible without checking the rules that apply to you.
- Comparing only the interest rate without reviewing APR and total costs.
The bottom line for Little Ferry buyers
Buying points can be a smart move when you plan to stay in your home beyond breakeven, have the cash to close, and value lower monthly payments. Lender credits can be useful when you want to keep more cash on hand at closing. The best choice depends on your holding period, loan size, cash reserves, tax situation, and loan program. If you want a clear side-by-side analysis tailored to Little Ferry and Bergen County, reach out for a quick consult and we will walk through the numbers together.
Ready to run your scenarios and compare options with local context? Connect with Alexa Micciulli for a friendly, data-informed planning call.
FAQs
What are mortgage discount points and how do they work?
- Discount points are upfront fees equal to 1 percent of the loan amount that you pay at closing to reduce your interest rate, typically for the life of a fixed-rate loan.
What are lender credits and why choose them?
- Lender credits reduce your cash to close in exchange for a higher interest rate, which can help if you prefer to keep more savings on hand at purchase.
How do I calculate the breakeven on mortgage points?
- Divide the cost of points by the monthly payment savings. The result is the number of months it takes to recoup the upfront cost.
Are mortgage points tax deductible for New Jersey buyers?
- Points on a primary home purchase can be deductible in the year paid if IRS rules are met, while refinance points are typically deducted over the loan term. Consult a tax professional.
Should I buy points if I might refinance soon?
- Usually no. If you refinance before you reach breakeven, you likely will not recover the upfront cost of the points.
How should I compare lender offers with different points?
- Get side-by-side quotes that show rates with no points, with points, and with credits. Check the APR and run breakeven math using your expected time in the home.
