If you haven’t heard of mortgage points yet and are considering purchasing a property, it’s time to start learning. Mortgage points are a purchasing strategy that allows buyers to essentially buy down the interest rate of their property. Mortgage points are becoming increasingly popular in a quickly increasing interest rate environment.
Many homebuyers are surprised that when they start browsing finance rates online, the advertised rates are achievable only with the purchase of mortgage points, not what they are offered initially.
What are mortgage points?
Buying mortgage points means buying down your interest rate before the loan originates. For example, when a borrower buys one point, they are buying down their interest rate by 0.25%. However, a point can have a bigger impact. It depends on the lender, so discuss the benefit of buying a mortgage point with your broker.
Sounds great, but it’s important to remember that the cost of a mortgage point is 1% of the loan value. So if your principal loan amount is $400,000, then the price of one point will be $4,000.
How much can buying mortgage points actually help?
When buying mortgage points, you reduce your interest rate and therefore reduce the monthly payment on a loan.
Let’s look at an example. If you are looking to take out a loan for $400,000, reducing your monthly interest rate by 0.25% will reduce your monthly payments by $83.33 or $1,000 the first year and less each year as the principal continues to decrease.
Are mortgage points worth it?
If you’re considering buying down your interest rate, you need to consider the break-even point. So, let’s revisit our example. If the cost of a mortgage point is $4,000, you need to figure out how many months it will take you to save the $4,000.
Once you have your break-even point, carefully assess how long you’ll stay in the property. If you think that there is a likelihood that you will be moving before that point, purchasing a point may not be in your best interest.
The number of points and how much you can lower your interest rate will depend on:
- Your lender.
- The loan type.
- The loan term.
If you are strapped for cash when buying your home, purchasing mortgage points may not be at the top of your priority list. However, if you have a little extra to spend and are concerned about actively increasing interest rates for a long-term purchase, this could be an excellent strategy to lock down a lower rate. Spend a little more so you can save more down the road. Reach out to a member of your team for more information.