The interest rate on your mortgage will have a major impact on the total amount you’ll pay over the life of the loan. If you’re buying a home that you plan to live for a long time, reducing your interest rate by purchasing mortgage points could allow you to save tens of thousands of dollars.
How Do Mortgage Points Work?
Mortgage points, or discount points, are fees that you can pay to the lender at closing in exchange for a reduction in your interest rate. One point costs 1 percent of the mortgage amount. The amount that the interest rate is reduced depends on the lender. Each point typically reduces the interest rate by one-eighth to one-quarter of 1 percent.
Should You Buy Mortgage Points?
The longer you own your house and make monthly mortgage payments, the more of an impact points can have. To figure out if it makes sense to purchase points, you need to look at your specific situation and crunch the numbers.
Compare the amount your monthly payments would be if you didn’t buy any points and paid the full interest rate to what you’d pay if you bought points. Divide the amount you’d spend on points by the amount you’d save on interest each month to figure out after how many months the savings would equal the cost of points. If you’d stay in your home after the break-even point, it would make sense to buy points. If you’d likely move before then, you’d be better off not buying points.
If you chose an adjustable-rate mortgage, points would generally only lower the interest rate during the fixed-rate period at the beginning. Figure out if you’d break even before the interest rate changed and you lost the reduction from points.
Putting down 20 percent of the purchase price could allow you to avoid paying for private mortgage insurance (PMI). You might save more by making a large down payment and avoiding PMI than you would by purchasing mortgage points to lower the interest rate. Run the numbers to figure out what would be better for your specific circumstances.
Buying mortgage points might also lower your tax liability. Discuss your specific circumstances with an accountant.
Figure out If Points Are Right for You
If you plan to stay in your home long-term, lowering your interest rate could help you save a lot of money. If you don’t plan to stay there long enough to break even, you’d be better off not buying points. Making a larger down payment to avoid PMI would be the better option in some cases. The only way to decide which is the right move is to consider the cost of the house you want, how much points would lower your interest rate, and how long you expect to live in the house, then do the math.
This article is intended for informational purposes only and should not be construed as professional or legal advice.
