Meta Description: What are mortgage points? Are they worth paying for? And what exactly do they do? Read on to find out everything you need to know about mortgage points.

When you apply for a mortgage, lenders will offer you mortgage points. These points are paid for at closing and can lower your interest rate. This is where the term "buying down the rate" comes from.

While paying for mortgage points is a reliable way to reduce your mortgage loan rate, it isn’t for everybody. Read through to find out if paying mortgage points is right for you or not.

What Are Mortgage Points?

Mortgage points, also known as discount points, are a cost you pay to get lower interest rates. They're essentially a discount that you get over the life of the loan, but you'll have to pay for them at closing.

Most lenders will allow you to purchase an average of one to three points. A point typically costs 1% of your mortgage and lowers your rate by 0.25%, although this could vary by lender. Lowering your rate by even just a little bit can help you save thousands of dollars over the life of the loan.

Need a quick benchmark? Purchasing mortgage points is usually only worthwhile if you intend to stay in your house for at least six years, as it takes a while for you to break even on your points purchase.

What Effect Does Mortgage Point Have On Your Mortgage?

Let’s use an example to illustrate how points impact your mortgage payments. Let's say you have a 20-year loan worth $300,000 with an interest rate of 3.25%. The table below will show you how much points cost, how much you can save, the potential rate savings, and how long it will take to break even.

From the table above, you can see that if you decide to pass on mortgage points, you will be passing up the opportunity to save a lot of money. Meanwhile, if you decide to spend $3,000 on one mortgage point, it will take you 6 years to get back the money spent on mortgage points, but you can save almost $7000.

This illustrates that while points can be a huge upfront cost, they more than pay for themselves in the long run. Consider whether you can afford the discount points and how long you’re staying in the property to decide if this is the right path for you.

When Is Paying For Mortgage Points Worth It?

Paying for mortgage points will reduce your rate, which in turn reduces your monthly payment. On the other hand, it increases the amount you have to pay upfront.

Instead of purchasing points, many borrowers opt to make higher down payments or overpay their monthly mortgage repayments to reduce the length of their loan. If saving money is your goal, knowing when (and when not) to pay for mortgage points is essential.

So, when is paying for mortgage points worth it?

• When you need to reduce your mortgage rate so it can be more affordable and easier to pay off.

• When you don’t qualify for the best rates due to a low credit score.

• When you have extra cash on hand and want to take advantage of the upfront cash deduction.

• When you plan to stay in the home for a long time and you can be assured of getting returns on your investment.

When Is Paying For Mortgage Points Not Worth It?

On the flip side, mortgage points aren’t a good idea for every homeowner. Here are a few situations where it may not be the best financial decision:

• When you have no intention of remaining in your current residence for an extended time. If you're someone that moves around every few years, you won't benefit much from a discount. Mortgage points are a long-term technique for saving money on interest – it takes a few years for the money saved on interest to outweigh the money spent on points.

• When you can’t afford to purchase points without emptying your savings account, borrowing money from someone else, or tightening your budget to an extreme. Instead of scrambling to put together the funds for points, consider overpaying your mortgage in the future as another way to save money on interest.

• When your down payment would be jeopardized. It's usually preferable to put extra money toward your down payment rather than points. Most times, making a higher down payment has more advantages in the long run.

Conclusion

Ultimately, the choice to pay for mortgage points is a personal decision that should be taken only after carefully weighing the long-term impacts and whether there is a better option.

While paying for mortgage points might be an effective way to reduce your mortgage rate, it just isn’t for everybody. Before you close, sit down and evaluate your budget, down payment, loan terms, and future goals. To determine if mortgage points will save you money in the long run, calculate your break-even point and consider how long you’ll be staying in your new home.

If you need expert advice on mortgage points, contact Wesley Financial Group. We’ll help you make the best of your mortgage loan!