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Are mortgage points worth it?

May 10, 2022
Posted in Programs
May 10, 2022 derekevansteam

Did you know it’s possible to lower your interest rate on your mortgage using something called mortgage points also known as discount points? If you’re planning on buying a long-term residence, utilizing this strategy could work in your favor. We’ll explain how!

What are mortgage points?

Mortgage points are paid at closing and are used to “buy down” the interest rate. Each point costs 1% of the mortgage amount. You can think of mortgage points as pre-paid interest on your loan. So let’s say you had a $400,000 mortgage, if you bought a full point, it would be priced at $4,000. But one mortgage point doesn’t translate to an entire percentage point on the interest rate (wouldn’t that be nice?!) Each mortgage point typically lowers the rate by 0.25 percent, though it’s not always an exact interval and varies among loan products. In this example, if you were quoted at a 5% interest rate, buying one mortgage point would bring that down to 4.75%, lowering the monthly payment, and increasing the closing costs by $4,000.. Borrowers can buy as many points as they want (to an extent–the loan cannot exceed a “high cost” threshold) and can even buy fractions of a point. The points are paid at closing.

Mortgage points strategy & example

Buying mortgage points is an excellent strategy if you are planning on staying in the home you are purchasing for a long time, say 10-15 years

 usually. To the right is a chart for an example, using our $400,000 loan amount from earlier that demonstrates the savings over time.

As you can see, you can save a decent amount after even 15 years. While it’s true you can’t always be certain whether you’ll stay in a home for 5, 10, 15, or 30 years, purchasing points may still be worth the risk. In the above example, even if you chose to buy 2 points but only stayed in your house for 5 years, you’d only be out $7. Whereas, if you decided to forego buying points and ended up keeping your home for 30 years, you’d lose out on almost $28,000! Depending on your situation, it may be a good idea to take a risk to lower your rate, even if you’re not 100% sure of the length of time you’ll keep your home.

Bankrate has a super helpful mortgage points savings calculator that you can use to input the numbers you’re working with in your personal circumstances.

Other things to consider…

Have you ever been shopping rates and spy a very attractive, very low rate that almost seems too good to be true? Odds are, that lender is advertising that rate WITH mortgage points attached, not the actual base rate. Look out for this when shopping, as this is a common deception. 

Additionally, we understand that on top of your down payment, closing costs, and other fees that come along with purchasing a home, forking up an additional few thousand dollars for mortgage points is not always an option for many buyers. Mortgage points are pre paid interest and therefore are a tax deduction, a benefit to consider and talk with your tax accountant about. But, it might be worth it to forego points to avoid stretching yourself too thin. You also want to consider if putting the money into your down payment is a better option than purchasing points, as a bigger down payment can also lead to a better interest rate for you by decreasing your loan-to-value ratio (the amount of the mortgage compared with the value of the home). 

There are many layers to points that can cause confusion for buyers, and understandably so. We’re happy to have one of our experienced loan officers take a look at your situation and walk you through your best options. Contact us!