What are mortgage points and should you pay them?
Paying mortgage points, also known as “buying down the rate,” is the process of paying interest on your home loan up front in exchange for a lower interest rate on the loan. In other words, it is prepaid interest that helps to lower your monthly mortgage payment by decreasing the interest rate on the loan.
The question of whether or not you should pay points will be a personal decision and will depend upon your unique situation. If you plan on living in the house for a long time and have the capital up front to pay points, you might want to consider it. However, it will all depend on the interest rate your mortgage provider can get you with the points you pay.
If you pay a single point, that means you are paying 1% of your mortgage amount. So 1% on a $200,000 mortgage would be $2,000. The important factor here is how the points impact the mortgage interest rate. This will be a function of the market, your lender and many other factors.
Sample Mortgage Point Calculation
- Mortgage Amount: $200,000
- 1 Point: $2,000
- Estimated Savings Per Month: $50
- Recoup Time: 40 months
While these figures are all fictional, the point is that the individual must determine if paying mortgage points is worth it or not. Your loan officer can help you weigh the pros and cons, but the decision should depend on your expectations for how long you plan to be in the house, your financial ability to afford the points and your lender’s ability to drive down the interest rate. Each scenario is different, but this helps to show how you could calculate if it is a smart investment or not.
Facts About Mortgage Points
- The amount that you can “buy down the rate” will vary from lender to lender. There isn’t a set amount that your interest rate can be reduced. It is more a function of the markets and your lender.
- There are different standards to consider when dealing with an adjustable-rate mortgage (ARM). For these kinds of loans, you will want to make sure your recoup time is within the fixed rate period of the loan.
- Your approach to points should also be considered with your approach to your down payment. These two up front payments must be considered together, and your loan officer can crunch the numbers to help you understand your options.
- There may be some tax incentives to buying mortgage points. You’ll want to speak with a tax and accounting professional to learn more.