Is It Worthwhile to Buy Mortgage Points?
If you buy mortgage points, you can reduce the interest paid on your loan, whether you’re acquiring a new home or refinancing an existing one. This can lead to significant savings over time, but the decision should be carefully weighed as you’ll only save money if you reside in the property long enough to recover the initial costs. Here’s an in-depth look into what you should know as you weigh the decision to buy points on your mortgage.
What Are Mortgage Points?
Mortgage points, or discount points, are fees paid to your lender at closing to secure a reduced interest rate on your loan. By providing the lender with cash upfront, you receive a lower interest rate that applies throughout the loan’s life.
This practice is commonly referred to as “buying down the rate” and may provide substantial savings over the loan’s duration. “The potential savings can be significant, but it’s crucial to evaluate the long-term impact and the time you plan to stay in the home,” explains Bryan Sherman, senior vice president and retail lending division executive at Bank of America.
Mortgage Discount Points vs. APR
When considering mortgage points, it’s essential to understand how they relate to the APR or annual percentage rate. Although buying discount points might reduce your interest rate, they will still be included in the APR, representing the true yearly cost of the loan. The APR encompasses various other expenses, such as broker fees, mortgage insurance premiums, and loan origination fees.
How Much Is a Mortgage Point?
A single mortgage point costs 1% of your total loan amount, translating to $1,000 for every $100,000 borrowed. For example, if you’re taking out a $250,000 loan, purchasing one point would cost you $2,500.
Most lenders offer flexibility, allowing borrowers to buy fractional points. In the previous example, purchasing half a point would set you back $1,250.
How Do Points Affect Your Mortgage Interest Rate?
Buying one point typically leads to a 0.25% reduction in your interest rate, although this discount can fluctuate between lenders. Lenders provide proportionally smaller interest rate discounts for fractional points. For instance, purchasing a half-point may grant you a 0.125% rate reduction.
Should You Buy Mortgage Points?
The decision to buy mortgage points depends on various factors, including your financial situation, loan size, and how long you plan to stay in the home. It’s generally considered a good investment if you intend to keep the property for an extended period, as the initial expense will be offset by the long-term savings in interest.
Working closely with a financial advisor or mortgage lender can provide personalized insight into whether buying mortgage points is suitable for your particular circumstances. Remember, while mortgage points can offer significant savings, they’re not a one-size-fits-all solution and should be carefully considered as part of your broader financial strategy.
