If you’re in the process of buying a home or refinancing your mortgage, you may have come across the term “mortgage points.” But what exactly are mortgage points, and how can they help you save money? In this guide, we’ll break it down in simple terms so you can decide if mortgage points are the right choice for you.
What Are Mortgage Points?
Mortgage points are fees paid directly to the lender at closing in exchange for a lower interest rate on your loan. This process is also called "buying down the rate." One point typically costs 1% of the loan amount. For example:
On a $200,000 loan, one point would cost $2,000.
Buying points can reduce your monthly mortgage payments and save you money over the life of the loan.
Types of Mortgage Points
There are two main types of mortgage points:
Discount Points
These points lower your interest rate.
The more points you buy, the lower your interest rate will be.
This can lead to significant long-term savings.
Origination Points
These are fees charged by the lender for processing the loan.
Unlike discount points, origination points do not reduce your interest rate.
How Do Mortgage Points Work?
Let’s say you’re taking out a $300,000 mortgage with a 30-year fixed rate. Your lender offers you a 4% interest rate with no points, but you can pay one point ($3,000) to reduce your rate to 3.75%.
Here’s how that breaks down:
Without Points: $1,432 monthly payment
With Points: $1,389 monthly payment
That’s a savings of $43 per month. Over 30 years, you’d save over $15,000 in interest, making the $3,000 upfront cost worth it.
Should You Buy Mortgage Points?
To decide if buying points is a good idea, calculate the break-even point—the time it takes for your monthly savings to cover the cost of the points.
Formula: Cost of points ÷ monthly savings = months to break even
Example:
$3,000 ÷ $43 = 70 months (about 6 years)
If you plan to stay in the home longer than 6 years, buying points could save you money. However, if you plan to sell or refinance soon, paying for points might not make sense.
Benefits of Mortgage Points
Lower Monthly Payments: Reduce your financial burden each month.
Long-Term Savings: Pay less interest over the life of the loan.
Tax Deductibility: In some cases, discount points can be tax-deductible. (Check with your tax advisor.)
When Mortgage Points Might Not Be Worth It
Short-Term Stay: If you plan to sell or refinance in a few years, you may not recoup the cost of points.
Limited Budget: If paying points stretches your finances too thin, it’s better to focus on other priorities, like your down payment.
Key Questions to Ask Your Lender
How much will each point reduce my interest rate?
What’s the total cost of the points?
How long do I need to keep the loan to break even?
Are there alternatives, like a no-cost loan?
Are Mortgage Points Right for You?
Mortgage points can be a powerful tool to save money on your home loan, but they’re not for everyone. Understanding how they work, calculating the break-even point, and considering your long-term plans are key to making the right decision.
If you’re unsure, talk to us to explore your options. With the right strategy, mortgage points can help you achieve your homeownership goals while saving money in the process.