Having a mortgage these days is expensive, so assessing whether mortgage points can be a good solution to pay less should be paramount for any buyer.
In an adverse real estate market of high home prices and high interest rates (like the current one), it is essential to look for ways to save money when you want to buy a home in the United States. One of those options for making a mortgage cheaper is through the purchase of mortgage points. But as in all things that have to do with finances, you have to evaluate before you act, analyze before you make a decision to see if it’s the right thing for you.
Mortgage points, also known as discount points, are payments that the borrower makes to the lender at closing in order to reduce their interest rate. Simply put, you make an investment to reduce your monthly mortgage payment and save interest on the value of your home.
In recent months, due to high interest rates and lack of demand, mortgage lenders try to motivate buyers to reduce their mortgage through discount points. However, unlike supermarket offers or any other product, here you have to pay a certain amount to get your rate reduced. It is not a promotion per se.
Typically, you’ll pay 1% of the total loan amount for each point and receive a 0.25% rate reduction, but the cost and discount varies by market and lender.
“What you get with a point from one lender could be very different than what you get with another lender,” Jennifer Beeston, mortgage educator and senior vice president at Guaranteed Rate, tells CNBC.
Each lender’s terms may also vary. Some may refer to it as mortgage points or discount points.
Should you buy mortgage points?
There are things to consider when deciding whether or not to buy mortgage points. First of all, you should consider whether or not you will live your whole life in the house you buy, or at least reach the break-even point of your mortgage and the points you have purchased to make it worthwhile.
The break-even point is the point at which the accumulation of your monthly savings from the payment of one or more mortgage points is ultimately reflected in the value of the loan you paid for the points to reduce your interest rate. In other words, for the points to actually save you money, what you paid for them must be reflected in your total mortgage savings.
For example, buying one point on a $200,000 mortgage means you will have paid $2,000 to reduce your rate from 4.1% to 3.85%. That generates monthly payments of $957 to $938, a savings of $19.
For the $19 to be worth the $2,000 savings you paid for the points, 105 months or 8.8 years must pass. That would be the break-even point, which means that, from that point on, any monthly payment on your mortgage will really save you.