Why You Might Want to Pay a Point (or Two) on Your Mortgage

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One percent of your entire loan amount, or $1,000, is what is known as a mortgage point. For instance, on a $100,000 loan, one point would be $1,000.

The act of “buying down” your interest rate involves choosing to pay mortgage points in advance in exchange for a lower interest rate and monthly payments. Mortgage points are essentially a form of prepaid interest.

In some cases, a lender will offer you the option to pay points along with your closing costs. Your mortgage APR will be lowered and your monthly payments will decrease in proportion to each point you pay at closing.

Typically, you would buy points to lower your interest rate on a fixed-rate mortgage. For adjustable rate mortgages, purchasing points only results in a reduction for the first fixed term of the loan and is typically not done.

So, you’re in the market for a new home and you’re trying to figure out how to get the best possible mortgage rate. You’ve heard about “points” and you’re wondering if it’s something you should consider.

In short, a point is a fee you pay upfront to your lender in exchange for a lower interest rate on your mortgage. It’s like a prepayment on your interest, and it can save you a lot of money over the life of your loan.

But is it right for you?

Here are a few reasons why you might want to consider paying points:

  • You plan to stay in your home for a long time. The longer you stay in your home, the more you’ll benefit from the lower interest rate. If you only plan to stay for a few years, it might not be worth it.
  • You have a good credit score. The better your credit score, the lower your interest rate will be to start with. This means that each point you buy will save you more money.
  • Interest rates are high. When interest rates are high, points become more attractive. This is because the savings from the lower interest rate will be greater.
  • You have extra cash on hand. Points are an upfront cost, so you’ll need to have the money available to pay for them.

Here are a few things to keep in mind before you decide to buy points:

  • The cost of points. Each point typically costs 1% of the loan amount. So, on a $300,000 loan, one point would cost $3,000.
  • The breakeven point. This is the amount of time it will take for the savings from the lower interest rate to outweigh the cost of the points. You can use a mortgage calculator to figure out the breakeven point for your specific situation.
  • The risk of refinancing. If you refinance your mortgage before the breakeven point, you’ll lose money on the points you paid.

Here are some additional resources that you may find helpful:

The choice to purchase points or not is ultimately a personal one. There is no right or wrong answer. It all depends on your individual circumstances.

Frequently Asked Questions

What is the difference between discount points and origination points?

Discount points are fees that you pay to lower your interest rate. Origination points are fees that the lender charges to process your loan.

Are mortgage points tax-deductible?

Yes, mortgage points are tax-deductible if you itemize your deductions.

How do I know if buying points is right for me?

There is no one-size-fits-all answer to this question. It depends on your individual circumstances, such as your credit score, the length of time you plan to stay in your home, and the current interest rate environment.

Where can I learn more about mortgage points?

There are several resources where you can find out more about mortgage points, such as the Bankrate website, the U S. Bank website, and the Consumer Financial Protection Bureau website.

Additional Resources

Disclaimer

I am an AI chatbot and cannot provide financial advice.

What is a mortgage APR?

Learn about annual percentage rate (APR).

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Is Buying Mortgage Points Worth It?

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