Understanding Mortgage Points: When Is It a Good Idea to Buy?

A mortgage point is a fee charged by the lender to lower the interest rate on your loan. One point equals one percent of the loan amount. So, if you’re borrowing $200,000, one point would cost you $2,000. These points are typically paid at closing, and you can pay them to the lender to reduce the total loan amount. Some lenders offer “no-cost” loans, which means that the borrower doesn’t have to pay any points. 

However, these loans usually have a higher interest rate. Whether or not you should pay points depends on how long you plan on staying in your home and how much cash you have available at closing. If you want to opt for mortgage points, it would be better if you have a comprehensive idea about home loans. Additionally, it’s also important to compare current mortgage rates, homeowners insurance options, current mortgage refinance rates, and read home loan reviews. 

Most people finance their homes by taking out a mortgage. A mortgage is simply a loan that is used to purchase a property. The property serves as collateral for the loan, which means that if you default on the loan, the bank can foreclose on the property and sell it in order to recoup its losses. When you take out a mortgage, you will typically be offered the option to pay “points.” Make sure you keep your loan amount in mind while determining how much points to buy. Also, don’t forget to consider the interest rate. It’s important to get your calculations right if you are determined to use the points for your mortgage.

There are some advantages to paying mortgage points. For starters, points can help to lower your interest rate. This can save you a considerable amount of money over the life of the loan. Additionally, paying points up front can help you to build equity in your home more quickly. Equity is the portion of your home’s value that you actually own; it is the difference between your home’s appraised value and the amount that you still owe on your mortgage. So, if your home is worth $250,000 and you owe $200,000 on your mortgage, your equity would be $50,000. 

mortgage point

How Do Mortgage Points Work?

Mortgage points are most often used in conjunction with a fixed-rate mortgage, and they can be either purchased or refinanced. If you choose to purchase points, you’ll generally need to pay for them upfront. In general, it takes about 3-5 years for the savings from lower interest payments to outweigh the cost of purchasing 1 point. However, this time frame can vary depending on the factors such as the size of your loan, the length of your loan term, and your mortgage rate. On the other hand, if you refinance your mortgage, you may be able to roll the cost of the points into your new loan. 

Of course, there’s no free lunch, and the upfront cost of buying points means that you’ll end up paying more interest over the life of the loan. That is why it would be wise to compare the total amount of interest with the cost of the mortgage points. The aim is always to reduce your interest rate, so consider the tenure of the loan also while calculating the cost difference. It should give a clear idea of how much you will eventually save if you use your mortgage points. 

Should You Buy Mortgage Points?

While there are many factors to consider when deciding whether or not to buy mortgage points, ultimately it comes down to a simple question of math. The three things that you need to consider while calculating are your loan’s tenure, the loan’s interest, and value of mortgage points in respect to the total loan amount. Here’s an example that should help you decide whether you should buy mortgage points or not.

If you plan on borrowing $200,000 for a home and get approved for a 30-year mortgage at 4.25% interest, your monthly mortgage payment would be $984.

One point: Buying one mortgage point for a .25 discount would lower your interest rate to 4%. This would make your monthly payment $955. 

Monthly savings: The monthly payment will go down from $984 to $955, a difference of $29.

Break-even point: Dividing the cost of the mortgage point by the monthly savings gives you the number of months it will take to recoup the cost of the point, which in this case is 2000/29, or 69 months, or just over 6 years.

Four points: Buying four points in order to get a 1% discount would lower your interest rate to 3.25%. 

Monthly savings: From $984, you’ll only have to pay $870 per month.

Breaking even: Dividing the cost of the mortgage point again by monthly savings ($8,000/114) shows that it would take 70 months, or just under 6 years, to break even on the cost of the points.

According to this example, you need to stay in the house for over 6 years to make buying one point worth it. Of course, this is all dependent on interest rates remaining relatively stable during the life of the loan. Therefore, do your math before you decide to buy mortgage points or use them in the first place for your home loan.

Comparing Mortgage Loan Offers

Understanding how mortgage points work is not the only factor that should make up your decision. You should also compare loan rates and fees, and determine how much you can afford. Suppose two lenders are offering you a loan of $200,000. However, one is offering a fixed rate of 4.25% and the other a mortgage point. The mortgage point is 1%. In this case, the first lender is offering you a lower rate.

But if you compare the two loans over their entire life, you will find that the mortgage point loan costs you more. This is because, with a mortgage point, you’re paying interest upfront in order to get a lower rate later. Therefore, it is always best to compare the options carefully before making any decision.

Mortgage points allow you to buy down the interest rate on your loan. One point costs 1% of the loan amount and lowers your interest rate by a fixed amount. Mortgage points can help you save money over the life of your loan, but you’ll have to pay for them when you close on your home. It is always wise to calculate whether or not paying points makes financial sense for your particular situation.

If you’re considering paying points on your mortgage, you should first find out the going rate for mortgage points in your area. You can check with your local bank or credit union, or look online for average rates. Calculate everything well in advance before you finally make a move.