Mortgage points, also called interest points, are a way to get a lower interest rate on your mortgage. Points are paid to the lender in exchange for a lower rate. How much money you save depends on how many points you buy, and the current market interest rates. Buying points can be a good way to save money in the long run, but it’s important to do the math to make sure you’re getting a good deal. This guide explains.
Mortgage Points, Explained
Mortgage points are a fee you can pay at closing in order to lower your interest rate. One point equals 1 percent of your loan amount. If you’re taking out a $500,000 loan, one point would cost you $5,000.
Mortgage points are sometimes confused with origination points, but they’re vastly different. Origination points are a fee charged by the lender to cover the costs of processing your loan. Mortgage points, on the other hand, are an optional fee that can be used to buy a lower interest rate.
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Should You Buy Mortgage Points?
Whether or not you should buy mortgage points depends on two factors: how much money you’ll save in interest, and how long you plan on staying in your home.
The longer you stay in your home, the more money you’ll save in interest by buying points. This is because the interest savings from buying points are front-loaded. In other words, you’ll save more money in interest in the early years of your loan than you will in the later years.
For example, let’s say you’re taking out a $250,000 loan with a 30-year term. The interest rate without points is 4.5 percent, and the rate with one point is 4.25 percent. The monthly payment without points would be $1,266, and the monthly payment with one point would be $1,247.
Over the life of the loan, you would save $2,219 in interest by buying one point. However, most of that savings would come in the first five years of the loan. In the first year, you would save $186 in interest. In the fifth year, you would save $959.
The bottom line is this: If you’re planning on staying in your home for at least five years, buying points could be a good way to save money. If you’re not planning on staying in your home that long, though, you probably won’t save enough in interest to make it worth your while.
You should talk to a financial professional if you’re considering buying mortgage points. Your adviser can give you the guidance you need to make the best financial decision.
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How to Buy Mortgage Points
If you decide that buying mortgage points makes sense for you, there are a few things you need to know. First, you’ll need to have enough money to cover the cost of the points. Second, you’ll need to find a lender who offers points. Not all lenders offer them.
When you’re shopping for a lender, ask about points. Find out if the lender offers them and, if so, how much they cost. You can also use a mortgage points calculator to estimate how much you would save in interest over the life of your loan.
After you’ve found a lender who offers points, it’s time to apply for your loan. When you’re filling out the loan application, you’ll be asked if you want to buy points. The cost of the points will be listed as a separate fee.
After you’ve been approved for your loan and you’ve paid the points, your interest rate will be lower than it would have been without points.
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