Is Buying Mortgage Points a Good Way To Get Lower Interest Rates?
Mortgage Points: What Are They & Should You Buy Them?
Buying a house is the most expensive investment anyone can do. Consequently, anything that can help you get lower interest rates is worth looking at.
Negotiating a good price and shopping for good mortgage rates is not enough for some homebuyers. In many cases, they buy mortgage points or “discount points” to obtain the best financial benefits.
Mortgage points are useful to secure a lower interest rate when buying a house. It can save you many dollars in interest over the life of the loan. However, you should be well-informed before considering them. Our top-rated Chandler mortgage company will explain everything you need to know about buying mortgage points.
What Are Mortgage Points & How Do They Work?
Discount points, better known as mortgage points, are fees you pay your lender to pay lower interest rates when buying a house or refinancing. You will give the lender cash to reduce the interest rate while you pay the loan.
A discount point is the equivalent of 1% of the loan amount. For example, with a $500,000 mortgage, you get a $5,000 discount point. You are using this point to lower the interest rate.
Let’s take an example with a $200,000 fixed-rate mortgage for 30 years:
- $200,000 mortgage at 4% interest
- One discount is 1% ($2,000) and lowers the rate by 0.5%
- That point lower the interest rate from 4% to 3.5%
- If the buyer buys two points upfront, it would be $4,000
- The monthly payment changes from $954 to $898
- The interest total changes from $144,016 to $123,336
- The total savings would be $20,680
- The borrower must live in the home for the term of the loan to save the $20,680 and never refinance.
Ask an Apache Junction mortgage company for more details about the discount points calculation if you have doubts.
Should I Buy Mortgage Points?
The decision depends on many factors, including if you have the budget and if you’ll have the loan long enough to pass the “break-even” point.
The break-even point is the upfront fee that equals the collected monthly savings. For example, if you paid $4,000 in upfront mortgage points, that amount is the same as $59.70 in interest savings per month. You will need at least 67 months to recover the money you paid for the points. Once you finish that, you’ll come out ahead.
You will lose cash on the mortgage points if you refinance the mortgage or sell the house before it reaches break-even.
Many homebuyers pay extra monthly to build equity and pay off mortgages faster. If you cannot do that, you can buy discount points to save some money.
So, when are buying discount points worth considering? This list can help:
- When you don’t meet the requirements for the lowest interest rates (bad credit score).
- When you want a tax deduction and you have extra cash to put down. Consult with a Gilbert mortgage company before paying upfront fees.
- When you want to reduce your monthly interest cost.
- If you plan to keep the house for more than 5 years.
Can I Negotiate Mortgage Points?
In most cases, mortgage lenders can negotiate mortgage points. You can also see mortgage points included in a quoted rate, even if you didn’t request it.
Mortgage lending varies depending on many factors, and mortgage professionals use their knowledge and experience to find the right mix for each borrower.
Are Mortgage Points My Best Option?
Buying discount points is an efficient way to pay upfront to lower interest rates. It is useful if you plan to stay in the house for a long time. The amount you’ll save each month will make the upfront cost worth it.
However, for some borrowers, paying for discount points is not the best if they are paying for other costs when buying a house. Sometimes it is a big financial stretch, and buying points may not work for lowering interest costs.
Should I Talk To a Mesa Mortgage Company?
If you cannot decide if mortgage points are the best for you, don’t worry, you don’t have to do the entire work. If you need help, KHoward Mortgage will happily help you. Contact us now or send us a message for more.
KHOWARD MORTGAGE TEAM
2913 N Power Rd #108
Mesa, AZ 85215