Should I Buy Points to Lower My Mortgage Rate?

It is always a good idea to do whatever you can to qualify for the lowest possible mortgage rate. A lower mortgage rate can reduce your monthly mortgage payments and decrease the overall amount of interest you pay over the life of your home loan. One way to do this is to pay mortgage points (aka “discount points). You can essentially buy down your mortgage rate with an upfront fee.

mortgage rate

How Do Mortgage Points Work?

Mortgage points basically allow you to reduce your qualified mortgage rate. If you have cash saved up for a large down payment, you may consider using a portion of that for buying discount points. Talk with your mortgage lender about this option and determine the best way to utilize your money. 

A mortgage point is equal to 1% of your home loan amount. Let’s say you are buying a home in the Atlanta area for $400,000. The cost to buy a discount point is 1% of that total, which is $4,000. Each point you buy is worth a mortgage rate reduction—generally somewhere between 0.125% and 0.25% depending on the lender and current market conditions. This could save you significant money on interest payments over the 30-year term of your mortgage loan. 

Paying Points When Mortgage Rates Are High

Discount points tend to be more popular during times when prevailing mortgage rates are higher. There is typically less of an advantage to this strategy when mortgage rates are already low. Again, you have to understand the pros and cons and figure out how to best utilize any cash you are putting down toward the purchase of your home. Mortgage points may offer better long-term savings. Or, a higher down payment could be better in your particular situation.

Mortgage Points vs. Down Payment

Both a higher down payment and paying mortgage points will be methods you can use to reduce your fixed mortgage rate. Which is better will likely depend on a number of different factors. Again, it is always best to consult with your mortgage lender. Have them present some estimates and crunch the numbers. You will be able to see how much total interest you would have to pay on a 30-year fixed-rate mortgage loan. You will then be able to calculate monthly mortgage payments.

For some home buyers, it may make more sense to apply all their cash toward a large down payment. This can reduce the mortgage rate while also reducing the total mortgage principal amount. On the other hand, mortgage points may be a better solution for other home buyers. 

Advantages of Mortgage Points

There are certain situations where buying mortgage discount points may be the preferred option:

• Lower-income home buyers may not qualify for a loan to purchase the house you want. Mortgage points could help you qualify with a lower mortgage rate and monthly payment.

• Using available cash to buy down mortgage points may be your best way to qualify for a mortgage loan compared to a larger down payment.

• You may be able to convince the home seller to pay discount points as part of the closing contract, thus helping you qualify for your mortgage loan.

Disadvantages of Mortgage Points

Purchasing points can save you money over the life of your loan because you will be lowering your interest payments. However, they may not provide great overall savings if you end up refinancing in the future or selling the property sooner. Points are often best for home buyers who intend to stay in the house for the life of the loan—or at least a long majority. 

If you plan to refinance as soon as mortgage rates drop, then you aren’t benefiting that much from buying down points at the beginning of your loan. You are better off applying that cash toward the down payment, thus reducing your loan principal and helping you qualify for an even lower interest rate in the future. Selling your property after a few years will obviously hinder the long-term savings presented by discount points, as well. 

However, points could be your best (or only) way to qualify for a mortgage loan now—especially if rates are currently high. It is at least worth a discussion with your mortgage lender. Understand the pros and cons of each approach and determine your best way to reduce mortgage rates and decrease the amount of interest you’ll be paying as long as you own your home.

If you have questions about mortgage loans and discount points, contact Moreira Team | MortgageRight today. Get started with your loan pre-approval now. Our team will help you figure out the best lending solution and lock in the lowest possible mortgage rate based on your qualification standards.