All You Need To Know About Mortgage Points

1. All You Need To Know About Mortgage Points Purchasing a home is one of the biggest financial decisions you’ll ever make. To maximize your mortgage for the lowest possible cost, you need to fully understand the options available to you. One such option is known as mortgage points. But what are they, exactly, and how can they help you? Let’s break it down. What Are Mortgage Points? Essentially, mortgage points (also called discount points) allow you to prepay interest at closing in return for a lower interest rate on your home loan. This is sometimes called “buying down” your mortgage. You pay an upfront fee, in effect, in exchange for reducing your monthly mortgage payment over the life of the loan, and thus save thousands of dollars in interest. How Do Mortgage Points Work? One mortgage point usually equals 1% of your entire loan amount and also lowers your interest rate by roughly 0.25%. So say you’re getting a $300,000 loan at an interest rate of 7%. With one point costing $3,000, your rate would drop to 6.75%.

2. You can also purchase fractional points or a lot of points, depending on your budget and how much you want to lower your rate. How Many Mortgage Points Can You Buy? There isn’t a legal limit on how many mortgage points you can buy, but lenders typically put a cap on it — often around 4% of your loan amount. Note: Buying points means you must pay extra cash at closing, so do factor in upfront costs versus long-term savings. Origination Points vs. Discount Points Mortgage points come in two forms: Discount Points These reduce your mortgage interest rate and save you money over time. Origination Points These are fees charged by the mortgage company for processing your loan. Unlike discount points, origination points don’t reduce your interest rate and are essentially administrative costs. When Should You Buy Mortgage Points? Purchasing mortgage points can be a smart financial move in certain situations. Here’s when it makes sense: You Want to Save Money on Your Mortgage Mortgage points help reduce your interest rate, leading to lower monthly payments and significant savings over the life of the loan. To see how much you could save, use a mortgage calculator to compare different scenarios. You Plan to Stay in Your Home Long-Term If you’re planning to stay in your home for many years, buying mortgage points can be a great investment. The longer you stay, the more time you have to benefit from lower interest payments. However, if you plan to move or refinance your mortgage within a few years, it may take too long to break even on the upfront cost.

3. You Have Extra Cash at Closing If you have additional savings and can afford to pay more at closing, purchasing points can be a strategic way to reduce long-term costs. However, if cash is tight, it might be better to put those funds toward a larger down payment instead. When Mortgage Points May Not Be the Best Option While mortgage points can be beneficial, there are situations where they may not make sense. You Plan to Move or Refinance Soon If you’re not staying in your home long enough to break even, the money spent on mortgage points may not be worth it. For example, if you sell your home before you recoup the cost of the points, you could end up losing money. You Need Cash for Other Expenses Instead of using extra cash to buy mortgage points, you might need it for a larger down payment, closing costs, or home renovations. It’s important to balance your budget and prioritize your financial goals. You Have an Adjustable-Rate Mortgage (ARM) If you're choosing between an ARM vs. fixed mortgage, mortgage points may not be as beneficial for an adjustable-rate mortgage. The rate reduction usually only applies to the initial fixed period, and once the rate adjusts, the benefits of the points may diminish. How to Buy Mortgage Points Purchasing mortgage points is a straightforward process: Discuss with Your Lender Your lender will outline the cost of mortgage points and help you determine if they align with your financial goals. Use a Mortgage Calculator A mortgage calculator can help you estimate how much you’ll save by buying points. Review Your Budget Make sure you have enough cash on hand to cover the cost of the points without straining your finances.

4. Final Thoughts Mortgage points can be a helpful tool for homebuyers who want to decrease their interest rates and save money over time. However, they aren’t the right choice for everyone. Think carefully about your financial status, long-term goals, and mortgage type before making up your mind. If you’re unsure whether mortgage points are right for you, consult with a trusted mortgage company to explore your options. Becoming educated about the mortgage process allows you to create an ideal mortgage strategy and can help you create the best financial situation possible for your home purchase.