Is It Worth It To Pay Mortgage Points
Mortgage points, also known as discount points or simply points, are fees paid directly to the lender at closing in exchange for a reduced interest rate on a mortgage loan. One mortgage point is equal to 1% of the total loan amount you pay. If you’re borrowing $250,000, one point would cost $2,500.
But are mortgage points worth it? That depends on a few factors, including your financial situation and how long you plan to stay in your home. Paying points can save you thousands of dollars over the life of your loan and can be a worthwhile investment. In others, it may not make financial sense.
Let’s take a closer look at what mortgage points are. The different types of points. And how to “buy down” points can affect your mortgage and homeownership.
What are mortgage points?
Mortgage points are fees paid to the lender at closing in exchange for a reduced interest rate on your mortgage loan. The more points you pay, the lower your interest rate will be. This can save you money over the life of your loan, as a lower interest rate means lower monthly mortgage payments.
For example, let’s say you’re taking out a 30-year fixed-rate mortgage of $250,000 at an interest rate of 3.5%. If you pay one mortgage point, or $2,500, your interest rate could be reduced to 3.25%. On a 30-year loan with a 3.5% interest rate, your monthly mortgage payment would be $1,122. If you pay one point to reduce your interest rate to 3.25%, your monthly payment would be $1,092, saving you $30 per month.
Of course, this is just an example, and the actual savings will depend on your specific loan terms and interest rate.
Types of mortgage points
There are two main types of mortgage points: discount points and origination points.
Discount points, also known as simply points, are the type of points we discussed above, where you pay a fee to the lender at closing in exchange for a reduced interest rate. Discount points are optional, and you can choose to pay them or not, depending on your financial situation and how much you stand to save with a lower interest rate.
Origination points, on the other hand, are fees charged by the lender to cover the costs of originating the loan. These points are not optional, and you must pay them as part of the closing costs.
Can you “buy down” points?
Yes, you can “buy down” points. Which means you pay a fee to the lender at closing in exchange for a temporarily lower interest rate. This can be a good option if you expect your financial situation to improve in the future. And you want to save money on your monthly mortgage payments in the short term.
For example, let’s say you’re taking out a 5/1 adjustable-rate mortgage (ARM) with an initial interest rate of 3.5%. With a 5/1 ARM, the interest rate is fixed for the first five years and then adjusts annually based on market conditions. If you expect your income to increase in the next few years, you might choose to “buy down” the interest rate by paying points at closing.
In this case, you could pay one point, or $2,500, to reduce your initial interest rate to 3.25%. This would lower your monthly mortgage payments for the first five years of the loan. After that, the interest rate would adjust annually, and you could end up paying more in the long run.
How do points affect your mortgage and homeownership?
First, paying points can lower your interest rate, which can save you money on your monthly mortgage payments. For example, if you pay one point on a $250,000 loan with a 3.5% interest rate. Your interest rate could be reduced to 3.25%, saving you $30 per month.
Second, paying points can also save you money over the life of your loan. As we saw in the example above, the savings on your monthly mortgage payments can add up over time. For example, if you pay one point to reduce your interest rate from 3.5% to 3.25% and you have a 30-year loan, you would save a total of $10,800 in interest over the life of the loan.
Third, paying points can also help you qualify for a lower interest rate> which can be especially helpful if you have a less-than-perfect credit score. Lenders often offer lower interest rates to borrowers who are willing to pay points, so if your credit score is on the lower side, paying points could help you qualify for a better interest rate.
On the other hand, not paying points can have some drawbacks. If you choose not to pay points, you may end up with a higher interest rate. Which means higher monthly mortgage payments. And more money paid in interest over the life of the loan. If you have a less-than-perfect credit score, not paying points could prevent you from qualifying for the lowest interest rates available.
Overall, whether or not it’s worth it to pay mortgage points depends on your financial situation. And how long you plan to stay in your home. If you can afford to pay points and you plan to stay in your home for a long time, it may be a worthwhile investment. If you can’t afford to pay points or you don’t plan to stay in your home for long, it may not make financial sense. It’s important to carefully consider your options and do the math before deciding whether or not to pay mortgage points.
Bottom Line:
Mortgage points are fees paid to the lender at closing in exchange for a reduced interest rate. Paying points can save you money on your monthly mortgage payments. And over the life of your loan. But whether or not it’s worth it depends on your financial situation. And how long you plan to stay in your home. It’s important to carefully consider your options and do the math before deciding whether or not to pay mortgage points.