Part of the home loan process involves making difficult financial decisions that you may not fully understand. A common topic of confusion is mortgage points and how they can affect mortgage rates. This is especially true for first time home buyers who may not have considered this aspect of mortgages.
By buying points on a mortgage, you can get a lower interest rate on the life of your loan. However, not everyone will benefit from the points-buying system. There are several factors that can influence your decision to spend the extra money to lower your mortgage interest rate.
Should You Pay Points on a Mortgage?
Understanding Mortgage Points
In essence, when you buy points on a home loan, you are making an upfront payment of a percentage of the loan which is paid at closing. In exchange for buying the point(s), you will receive a reduced interest rate. This allows for a lowered monthly mortgage payment for the borrower. The more money you pay for points, the lower the rate of your mortgage gets.
The discount mortgage points are based on the size of the loan and not the sales price. One point equals one percent of the loan amount. If you had a mortgage loan for $200,000, a point would usually cost $2,000. The percentage amount of loan’s interest rate is typically reduced by a quarter of a percentage point but the point amount will vary by lender and fluctuate based on the bond market. The rules can change from lender to lender, and even change daily, but most lenders allow the borrower to pay for a half of a point to 4 or more discount points to decrease their mortgage rate.
Should You Buy Points?
You will need to estimate the benefits of buying points on your mortgage versus not buying down for a lowered rate. The main factor in determining if points will help you financially is knowing how long you will keep your mortgage. As a rule of thumb, if you plan to sell or refinance your home within two years, buying discount points will not be advantageous. If you are confident you will remain in your home with your current mortgage, you can save a lot of money over time by buying points. If you are planning to sell between the 3 and 9 year marks, you might want to seek out the counsel of your lender to decide if buying points is worth your while.
Different Lenders, Different Rules
If you have already selected a mortgage lender, then determine how they assess points and run the numbers on your loan offer to see how long it will take for you to recoup the cost of points, and how much you might save in the long run. If you are still investigating lenders and are considering purchasing points to reduce your interest rate, make sure you inquire from each loan officer how they assess buying points on the mortgages they offer, and then use that information when comparing mortgage rates and costs. Remember that different lenders play by different rules so figure out what you want from a home loan and then seek out the lenders who offer what you need.
Can You Afford It?
Buying a home is an expensive transaction. Even though the majority of the funds come from a mortgage loan, home buyers still need to pay for an assortment of expenses involved such as moving expenses, utility set up, homeowners insurance, decorating, and so on.
Buying points can lower your interest rate and be a long term benefit. But it is also an immediate expense. Lenders usually require payment for the points at the time of closing – adding to your mortgage closing costs. You want to make sure you can afford the upfront costs of buying points and still cover the rest of the expenses associated with your new home. Calculate the amount of money it takes to settle on the home sale and move. Then consider the additional costs of points buying before making commitments to your lender.