What Are Mortgage Points and Are They Worth It?
To the average home shopper out there, there’s a lot about the mortgage process that’s confusing. By and large, one of the topics that seems to be the most confusing for people is the concept of mortgage points. Many home buyers have no idea what mortgage points are or how they work.
In this guide, we walk through an easy explanation of everything you need to know about mortgage points. By the time you’re done reading this short blog post, you should be able to make an informed decision about whether to buy them as you begin your home buying journey.
Mortgage Points Made Simple
When you’re considering purchasing mortgage points as a home buyer, it’s important to get a definition of the process that is as short and clear as possible. You don’t need unnecessary industry jargon or terms that can result in even more head-scratching.
In its simplest form, mortgage points “are upfront fees paid directly to the lender at closing in return for a lower interest rate.” One “point” equals 1 percent of the total amount of the home loan (or $1,000 for every $100,000 borrowed). In a nutshell, that’s it.
Why Borrowers Might Consider Buying Mortgage Points
The simple answer to why a borrower like yourself might want to buy mortgage points at closing is to lower your monthly mortgage payment. Purchasing points can reduce the interest rate, which can potentially save borrowers thousands of dollars in interest over the life of the loan. If that sounds like a decent bargain you’d be willing to consider, make sure you read on.
The Key to Buying Mortgage Points
Taken at face value, buying mortgage points might seem like a no-brainer for any borrower; but as you might have expected, this isn’t always the case. For points to work to a borrower’s advantage, you first need to determine your break-even point.
To determine the answer, divide the cost of the points by how much will be saved on the monthly mortgage payment. This will tell you how long it will take for the interest savings to equal the cost of the mortgage points being purchased. If a borrower isn’t planning on owning the property for as long as it takes to break even, then spending the money upfront won’t provide the borrower any additional savings.
A good rule of thumb to follow is – if you can’t break even within 36 months (or less), then buying mortgage points usually isn’t worth the upfront expense.
Important Considerations With Mortgage Points
The terms pertaining to mortgage points can vary lender to lender, so it’s vital to find out everything you can about the terms before making a move when you’re a mortgage client. Some additional things to consider can include:
- When borrowing an adjustable-rate mortgage (ARM), purchasing points typically only provides a discount on the interest rate during the initial fixed-rate period.
- Depending on the situation, buying mortgage points can provide the borrower a tax benefit.
- If the borrower is not putting at least 20 percent down on the home, then putting extra money down instead of buying points (to get them to 20 percent) will help them avoid having to pay private mortgage insurance (PMI).
- There is no fixed interest rate deduction associated with mortgage points. Only the lender and marketplace determine how much a borrower’s interest rate will be reduced.
