What’s the Point of Paying Points?
When interest rates for mortgage loans go up, homebuyers look for ways to lower their payment, and paying mortgage points is an option.
In short, when you buy points, you pay an extra fee upfront in exchange for a lower interest rate and monthly payment. Since you could pay less over time, you may decide paying points is a good choice if you plan to live in the home for an extended period of time.
Points are paid at closing and increase your total closing costs. Each point equals one percent of the loan. For example, one point on a $200,000 mortgage would be $2,000. Two points would be $4,000 and so on. You can pay partial points too, such as half-point ($1000).
An advantage of paying for mortgage points is that they are pre-paid interest and may be deductible, as home mortgage interest, at tax time if you itemize deductions.
A potential drawback of paying points is that it could reduce the amount of money you have available for a down payment or cash you may otherwise want to use to furnish your new home or save for routine maintenance.
Depending on the housing market, you may negotiate with the home seller to pay the points or split the amount with you. The seller could potentially save money by paying the buyers points, vs. reducing the sale price of the home. Note that the exact amount that your interest rate will be reduced depends on the type of loan, housing market conditions in your area and the lender you have chosen.
To help you decide if discount points are right for you, ask the lender to show you the impact that buying points will have on your monthly payment. They can explain the break-even point, which is how long it would take before your cumulative monthly savings equals the cost of the points.
It pays to shop around for your mortgage because pricing structures vary by lender. A loan with one point at one lender may or may not have a lower interest rate than the same type of loan with zero points at another lender simply because one charges more than another to process a loan.
Find a lender who explains every aspect of the mortgage process to you and is transparent about how discounts and fees factor into the costs of buying a home.