You’ve decided that you’re ready to purchase a house. You’ve started looking at listings online,…
We know, we sound like a broken record, but mortgage rates are historically low right now. Why buy mortgage points to lower your interest rate—are they something you should consider when rates are so low?
Buying mortgage points, or buying down your rate, can be a smart strategy no matter how low-interest rates are. We ALWAYS recommend looking at the cost of mortgage points to determine how much money you could save long-term. In some circumstances, mortgage points are worth paying for.
What is a Mortgage Point, Exactly?
Just what is a mortgage point? Well, it’s something you pay for as part of your closing costs (one point is equivalent to 1% of your loan amount) that lowers your interest rate by a fractional amount. The best part? Well, this interest rate reduction is for the entire term of the loan.
As you can imagine, that could be a pretty sweet tradeoff under the right circumstances.
How Much Do Points Lower Your Rate?
It can be a little tricky because points depend on a lot of factors—the interest rate environment, the lender, and the specific loan product you’re using. But typically, a point lowers your interest rate a quarter of a percent.
For instance, let’s say that you’re getting a $400,000 loan. And let’s say that purchasing a point lowers your interest rate by a quarter of a percent, or .25%. You want to buy two points to lower your rate by .50%.
1% of your loan amount is $4,000, so you’d need to spend $8,000 to get a rate that’s .50% lower. Of course, this will shave down your monthly payment since you’ll have a lower interest rate.
Also, you don’t have to buy an entire point. You can buy half a point or even a quarter of a point if that’s what you want to do.
Are Mortgage Points Worth Paying For?
Just like everything else when you’re getting a mortgage, it depends. The most important thing is to calculate your breakeven point. In the scenario above, you’d need to save more than $8,000 off of your monthly mortgage payments over the life of the loan for mortgage points to be worth paying for.
As you can imagine, if you’re not going to be in your home for very long, it may not be worth paying points to lower your interest rate. It all depends on the size of your loan, interest rate, and terms, but in general, it’s usually more than a couple of years to breakeven.
Additionally, if you think you’ll refinance any time soon, paying to buy down your interest rate is likely not in your best interest.
In a purchase scenario, it’s possible that your extra money might be better off going toward your down payment. This affects your interest rate and things like mortgage insurance, which is another monthly fee. Even better, unlike an additional fee, down payment money goes to equity, which you will likely recoup at the time of sale.
Every loan scenario is different, but one of the biggest factors to consider when buying down your interest rate is your short- and long-term goals. At New Way Mortgage, we’re happy to help you determine what works best for you and your financial situation.
Consider the Alternatives
It’s also important to think about the opportunity cost of using cash to purchase mortgage points. You could use that money to grow your money over time with a higher-yielding investment or retirement account. Make sure you’re not throwing money at a lower interest rate when your money could be doing you more good somewhere else.
How Mortgage Points Affect Comparison Shopping
Some lenders give you a low-interest rate but include points in the terms of the loan. In order to compare apples to apples, make sure you ask for a Loan Estimate.
Have questions? Give us a call or text at (916) 465-6639 or visit our website at newwaymortgage.com. We’re here to talk through all of your loan options.