Mortgage points, also known as discount points, are upfront fees that borrowers pay to their mortgage lender in exchange for a lower interest rate on their loan. This practice is sometimes referred to as “buying down the interest rate.” By reducing the loan’s interest rate, borrowers can lower their monthly payments and potentially save money over the life of the loan.
Key Facts
- Mortgage points are upfront fees that borrowers can pay to their mortgage lender in exchange for a lower interest rate on their loan.
- Each point typically costs 1% of the mortgage amount. For example, on a $300,000 mortgage, one point would cost $3,000.
- Buying mortgage points can lower the interest rate on your loan, typically by 0.25% per point. The exact reduction in interest rate may vary among lenders.
- Points can be purchased in increments of eighths of a percent, or 0.125%.
- The cost of the points is paid at closing and is added to the other closing costs of the mortgage.
- It’s important to calculate the breakeven point before buying mortgage points to determine if it will save you money in the long run. The breakeven point is the point at which the savings from the lower interest rate surpass the cost of the points.
- The benefits of mortgage points, such as lower interest rates and potential tax deductions, need to be weighed against the upfront cost of the points.
How Mortgage Points Work
Each mortgage point typically costs 1% of the mortgage amount. For example, on a $300,000 mortgage, one point would cost $3,000. Borrowers can purchase points in increments of eighths of a percent, or 0.125%.
Buying mortgage points reduces the interest rate on the loan, typically by 0.25% per point. The exact reduction in interest rate may vary among lenders. For instance, if a borrower purchases one point on a $300,000 mortgage, their interest rate may be reduced from 6% to 5.75%.
Benefits and Drawbacks of Mortgage Points
Benefits
- Lower interest ratesMortgage points can significantly reduce the interest rate on the loan, resulting in lower monthly payments and potential savings over the life of the loan.
- Tax deductionsIn some cases, the cost of mortgage points may be tax-deductible.
Drawbacks
- Upfront costMortgage points are paid upfront at closing and are added to the other closing costs of the mortgage. This can be a substantial expense, especially for borrowers with limited funds.
- Breakeven pointIt’s important to calculate the breakeven point before buying mortgage points to determine if it will save money in the long run. The breakeven point is the point at which the savings from the lower interest rate surpass the cost of the points.
How Much Can You Save by Paying Mortgage Points?
The amount of money that can be saved by paying mortgage points depends on several factors, including:
- The amount of the loan
- The interest rate reduction
- The length of the loan term
- The cost of the points
To determine the potential savings, borrowers should use a mortgage points calculator, which is available online from various lenders and financial institutions.
Should You Buy Down Your Interest Rate with Points?
The decision of whether or not to buy down the interest rate with points is a personal one that should be based on the borrower’s financial situation and goals. Borrowers who plan to stay in their home for a long period of time and can afford the upfront cost of the points may benefit from this strategy. However, borrowers who are not sure how long they will stay in their home or who have limited funds may want to consider other options for lowering their interest rate, such as negotiating with the lender or refinancing the loan.
How to Compare Mortgage Loan Offers
When comparing mortgage loan offers, it’s important to consider the following factors:
- Interest rateThe interest rate is the most important factor to consider when comparing mortgage loans. A lower interest rate will result in lower monthly payments and potential savings over the life of the loan.
- PointsThe cost of the points should be factored into the overall cost of the loan. Borrowers should compare the interest rate reduction offered by each lender with the cost of the points to determine the best value.
- Closing costsClosing costs include various fees associated with obtaining a mortgage, such as loan origination fees, title insurance, and appraisal fees. Borrowers should compare the closing costs of different lenders to find the most competitive offer.
- Loan termsThe loan term refers to the length of the loan, typically 15 or 30 years. Borrowers should choose a loan term that meets their financial needs and goals.
Conclusion
Mortgage points can be a valuable tool for borrowers who are looking to lower their interest rate and monthly payments. However, it’s important to carefully consider the benefits and drawbacks of mortgage points before making a decision. Borrowers should use a mortgage points calculator to determine the potential savings and compare mortgage loan offers from different lenders to find the best value.
Sources
- Mortgage Points: What Are They?
- Mortgage Points: What Are They And How Do They Work?
- Mortgage Points Calculator
FAQs
How much does it cost to buy one point on a mortgage?
Each mortgage point typically costs 1% of the mortgage amount. For example, on a $300,000 mortgage, one point would cost $3,000.
Can I buy less than one point on a mortgage?
Yes, you can buy mortgage points in increments of eighths of a percent, or 0.125%. For example, you could buy 0.5 points on a $300,000 mortgage for a cost of $1,500.
How much will my interest rate decrease if I buy points?
The exact reduction in interest rate may vary among lenders, but typically each point purchased will reduce the interest rate by 0.25%. For example, if you buy one point on a $300,000 mortgage with an interest rate of 6%, your interest rate may be reduced to 5.75%.
How can I calculate the cost of buying points?
To calculate the cost of buying points, simply multiply the number of points you want to buy by the cost of one point. For example, if you want to buy one point on a $300,000 mortgage, the cost would be $3,000.
Are there any fees associated with buying points?
The cost of the points is paid at closing and is added to the other closing costs of the mortgage. These may include loan origination fees, title insurance, and appraisal fees.
How long will it take me to recoup the cost of buying points?
The breakeven point is the point at which the savings from the lower interest rate surpass the cost of the points. The breakeven period will vary depending on the amount of the loan, the interest rate reduction, and the length of the loan term.
Should I buy points on my mortgage?
The decision of whether or not to buy points is a personal one that should be based on your financial situation and goals. If you plan to stay in your home for a long period of time and can afford the upfront cost of the points, buying points may be a good option for you.
How can I compare the cost of points from different lenders?
When comparing mortgage loan offers, it’s important to consider the interest rate, the cost of the points, and the closing costs. You should also compare the breakeven period for each loan offer to determine which one is the best value for you.