What are Mortgage Points?
Mortgage points, or discount points, are fees paid to the lender when you close on your home in exchange for a reduced interest rate. In essence, they are a down payment on interest when you purchase your home.
One mortgage point usually costs one percent of your loan amount. For example, if your mortgage is $100,000, one point costs $1,000. Most lenders will let you purchase up to three points on your mortgage.
What is My Breakeven Point?
When trying to determine whether or not buying purchase points is right for you, first try to determine your breakeven point. The breakeven point is how long it takes to recoup the money you spent up front on discount points. Below is the formula used to determine your breakeven point:
Points Cost ÷ Monthly Payment Savings = Months to Reach Breakeven Point
The longer you stay in your home the more sense mortgage points make. If you spend $4,000 on points and you are saving $50 a month on interest it would take you 80 months or over six and a half years to break even on what you spent on mortgage points. If you plan on staying in your home long-term, make sure that you are financially prepared for the extra expense mortgage points to bring to the home buying experience
Beyond how long it might take to break even, there are other considerations:
- The interest rate discount you receive depends on the lender, it is not a set rate.
- There may be a tax benefit to purchasing mortgage points.
- If you decide to go with an adjustable rate mortgage, mortgage points typically only apply during the fixed rate period of your mortgage. Make sure that your breakeven point occurs before that fixed rate expires.
Not all lending programs are created equal. It’s helpful to have an expert help sort through what options may be available. Having experience on your side can save you both time and money.
Larger Down Payment Vs. Mortgage Points
Sometimes it is more economical to use the money that would be spent on mortgage points on your down payment. Use a mortgage calculator to see what your payments would be with a higher down payment then compare that to the discount you would receive by buying mortgage points.
Larger down payments can be a cheaper and more effective way to lower your mortgage payments compared to mortgage discount points. The more money you save for the down payment, the less you have to borrow in a loan. By borrowing less money, you will have fewer interest payments and will be able to pay off the mortgage faster.
Mortgage points are effectively a down payment on the interest you will pay over the life of your loan. For the first few years of your mortgage, you will primarily pay off interest. By buying mortgage discount points, you reduce the amount of interest owed on the home without paying off any of the value of the house. This reduces your monthly payments based on the amount of interest you pay for up front.
Mortgage discount points are an additional cost beyond your down payment and closing costs. Make sure that you can afford that additional expense. Our loan experts will sit down with you and help you decide if this makes sense for you. Reach out to our team today!
When are Mortgage Points Right for Me?
Buying a home and paying upfront for your mortgage points might make sense if you plan on staying in your home for a long time with a fixed interest rate. Because mortgage points add additional cost, it is important to be financially prepared. If you think mortgage points might be the right fit for you or you simply have more questions, our experts are here to help. Contact us today!