What are mortgage points? Understanding the cost of your loan.
There’s a not-so-secret method to lowering your monthly mortgage payment and the total amount you pay in interest on your loan. It’s called mortgage points.
Essentially, mortgage points allow you to buy down the rate of your future home loan. One point will cost you 1 percent of your total mortgage. But, as with everything in life, it’s a bit more complicated than that. Luckily, I’m here to simplify things a bit and help you decide if you should buy down your rate.
The Basics of Mortgage Points
When you buy down your rate (also known as buying points), you spend money up front for a lower interest rate. A point equals one percent of the loan amount. This amount is added to your closing costs and paid at closing.
Should You Buy Points?
The answer depends on how long you plan to live in the house, how many points you can afford to buy, and if you have the cash to make it happen.
Here’s some math. Let’s say you’re buying a home worth $425,000 with a down payment of $25,000. Now let’s give your pretend mortgage a rate of 5.0%. If you buy two points, you would lower your 30-year fixed rate to 4.5%. Remember, each point lowers the rate by a quarter of a percent. However, each point on a 400,000 loan will cost $4,000, for a grand total of $8,000.
Without factoring taxes and other home loan expenses, you could expect to pay $2,027 per month with the point-positive home loan. If you didn’t buy the points, your monthly mortgage payment would be $2,104. That’s a savings of $924 per year and a whopping $27,720 over the life of the loan.
Here’s the bad news. Your break-even point to recoup your $8,000 investment would be 8.7 years or 104 months. Is it worth it? Again, that depends on how long you plan to live in the home.
You’ll know it’s the right choice if this is your forever home (or at least forever beyond your break-even point), and the extra expense (on top of your down payment) won’t break your savings account.