One key factor affecting mortgage payments is the loan interest rate. Lower rates save you money monthly and over the loan’s life. Lenders often offer the option to purchase mortgage points, allowing borrowers to pay a fee upfront for a reduced interest rate.
What Are Mortgage Points?
Mortgage points, or discount points, are fees paid to lower the interest rate on your mortgage. One point costs 1% of your loan amount. For example, on a $300,000 mortgage, one point costs $3,000. You can also buy fractional or multiple points to further reduce your interest rate.
How Do Mortgage Points Work?
Each point typically reduces the interest rate by 0.25%. Points are paid at closing or rolled into your loan. Generally, buying four points lowers your rate by 1%, the maximum most lenders allow.
Impact on APR
Buying points lowers your loan’s annual percentage rate (APR), as it includes the interest rate and additional fees.
Points and Adjustable-Rate Mortgages
Points work similarly for adjustable-rate mortgages (ARMs) and fixed-rate loans, but the ARM rate adjusts after a set period.
Benefits of Mortgage Points
Savings Over Loan Term:
Points increase closing costs but can lead to significant long-term savings.
Lower Monthly Payments:
Reduced interest rates mean smaller monthly payments.
Tax Deductions:
Mortgage interest, including points, may be tax-deductible.
Savings Example
For a $350,000 loan at 7% interest:
0 points: $838,281 total mortgage cost
0.5 points ($1,750): $827,730 total, saving $10,551
1 point ($3,500): $817,234 total, saving $21,047
2 points ($7,000): $796,406 total, saving $41,875
When to Buy Points
Long-Term Stay: It is more beneficial if you plan to stay in the home long-term.
Breakeven Point: Calculate when savings from lower payments exceed the cost of points.
Breakeven Example
A $350,000 loan at 7%, buying two points for $7,000 lowers the rate to 6.5%, saving $117 monthly. Break-even is approximately 60 months (5 years).
When Not to Buy Points
Short-Term Stay: It is not beneficial if you plan to sell soon.
Extra Payments: Points may not save much if planning to pay off the loan early.
Limited Funds: Don’t deplete savings for points; prioritize down payments.
Refinancing Plans: Avoid points if you plan to refinance soon.
Conclusion
Mortgage points can save money but aren’t for everyone. Assess your budget, down payment, loan terms, breakeven point, and future plans before deciding. If ready to buy or refinance, start your application with V Nation Corp® today.
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