Buying mortgage points is a way to secure a lower interest rate during the home buying process. It can save you several thousands of dollars in interest over the life of the loan and lower your monthly mortgage payment. Check out this nifty guide to learn how they’re calculated so you can assess if purchasing mortgage points makes sense for your situation.
Mortgage points, also known as discount points, are fees you pay your lender to reduce your interest rate when you purchase homes or refinance. You’ll give your mortgage lender cash upfront to reduce your interest rate for the life of the loan.
If you have the budget for buying points, the decision often comes down to whether you’ll have the loan long enough to pass the “break-even point.”
The concept of the break-even point is easy to understand:
The break-even point is when the upfront fee equals the accumulated monthly savings. So let’s say that you paid $4,000 in upfront mortgage point fees, which translates to $59.70 in interest savings per month. $4000 divided by $59.70 equals 67.
That means it will take 67 months to recoup the money you paid for the points. After that, you’ll come out ahead.
So if you selling the home or refinancing the mortgage before it hits break-even, you’ll lose cash on the mortgage points you bought.
The break-even point differs, depending on the loan’s size, term, and interest rate. However, it usually takes more than just two or three years to reach it.
Most buyers make large down payments or pay extra monthly to build equity quickly and pay off mortgages earlier.
If you can’t apply the above strategy, buying discount points is an excellent option. Here, we share a list of when buying points are worth considering:
When you don’t qualify for the lowest interest rates because of a low credit score.
If you want the upfront tax deduction and have extra cash to put down.
You need to reduce your monthly interest cost to reduce your monthly mortgage payment.
You plan to keep your house for more than 5 years, giving your time to regain the cost.
Generally speaking, the answer is yes. In most cases, mortgage professionals have the discretion to negotiate mortgage points. In fact, sometimes mortgage points are included in a quoted rate even if you didn’t request it.
Many factors in mortgage lending are variable (to a degree), and mortgage professionals use their expertise to find just the right mix for each particular situation and borrower.
Purchasing mortgage points makes sense since it can reduce the overall cost of your loan.
If you’re still having a hard time deciding, don’t worry, you don’t have to crunch the numbers on your own. If you need help determining if buying mortgage points is right for you, our mortgage advisors will happily lend a hand. Give us a call or send us a message on our site today.
Jeff Lazerson - Mortgage Columnist since 2011