What Are Mortgage Points?

If you're getting a mortgage to buy a home, your lender may give you the option to buy 澳洲幸运5开奖号码历史查询:mortgage points when finalizing the loan details. 澳洲幸运5开奖号码历史查询:Mortgage points, also called 澳洲幸运5开奖号码历史查询:discount points or simply "points," reduce the interest rate on a home loan in return for a fee. Typically, one point costs 1% of the loan amount. Buying points could save you money in the long run, but it's important to understand how they work and when it makes financial sense to buy them.

How Mortgage Points Work

Mortgage points work by lowering the interest rate on a home loan. Points are considered prepaid interest, and you may have the opportunity to buy them when you're:

• Getting a loan to purchase a home
• Refinancing an existing mortgage
• Taking out a 澳洲幸运5开奖号码历史查询:second mortgage, such as a 澳洲幸运5开奖号码历史查询:home equity loan

Here's an example. Assume you're taking out a $350,000 mortgage to buy a home and qualify for a 7.25% interest rate. Your lender gives you the option to buy points to bring the rate down.

If one point is equal to 1% of the loan amount, you'd pay $3,500 per point. You purchase two points to buy down your rate, which means you'll pay the lender $7,000, due at closing.

Lenders determine how much of a rate reduction you qualify for when buying points. For instance, paying for one point might trim 0.25% off your rate with Lender A while 𒅌Lender B will discount your rate by 0.75%. Comparing discount rates with different lenders can give you a better idea of how much you could save.

It's also important to calculate the 澳洲幸运5开奖号码历史查询:break-even point, especially if you don't plan on staying in🦹 that home indefinitely. This is when you'll recoup the upfront cost of buying points through interest savings. To calculate the break-even point you'd divide what you pay for points by the amount you save on monthly mortgage payments.

Pros and Cons of Mortgage Points

Buying points may be more appropriate in some situations than others. It's useful to consider the advantages and potential disadvantages side-by-side.

Benefits of Mortgage Points

Buying points can offer some tangible financial benefits to homeowners. Depending on the details of your situation, poin🍷ts could help you to:

• Lower your interest rate, making the mortgage less expensive overall.
• Reduce your monthly mortgage payments since you're getting a lower rate.
• Increase interest savings over the life of the loan.
• Qualify for a larger mortgage.

Even a small reduction in your interest rate could make a substantial difference in what you pay monthly and over the life of 🌸the mortgage.

Drawbacks of Mortgage Points

While points can yield savings for homeowners, they aren't right for everyone. As far as the drawbacks go, buying points can:

• Increase the amount you need to come up with at closing by several thousand dollars.
• Drain cash reserves if you have limited savings to cover closing fees.
• Require a lengthy wait until you hit the break-even point to realize any savings.
• Yield minimal savings (if any) if you don't stay in the home long enough.

Should You Buy Mortgage Points?

Buying points is a personal decision that requires careful consideration of your finances and long-term plans. Asking the right questions can help you decide if it mak🍬es s🌄ense to buy down your mortgage rate. For example:

• How long do you plan to stay in the home?
• How long is the mortgage term?
• What will you pay for points and how much will that reduce your interest rate?
• What will your monthly payments be with points vs. without them?
• How much will you save in interest over the life of the loan?

When to Buy Mortgage Points

You might consider buying mortgage poin♈t🐲s if you:

• Could reach the break-even point relatively quickly.
• Have sufficient cash to cover the additional closing costs, without depleting your savings.
• Plan to stay in the home for the long term, which will yield the most savings on interest.
• Don't expect to refinance the home before reaching the break-even point.

If you're considering points it's important to know exactly how much your rate would be reduced vs. what you'll pay. Your lender should provide you with documentation showing what the new rate would be depending on how many points you're prepared to buy.

When Not to Buy Mortgage Points

You might want to skip buying points if you:

• Would need to use all of your cash reserves or siphon money away from your down payment to cover the additional closing costs.
• Anticipate that it will take a long time to reach the break-even point.
• Plan to sell the home or refinance the mortgage before reaching the break-even point.

Using all of your spare cash to buy points could be a mistake if you need to make expensive repairs or have another emergency right after purchas�﷽�ing the home. In that scenario, you might need to turn to a high-interest credit card or loan to cover the gap.

Examples of Mortgage Points

Calculating what you'll pay for a mortgage with or without points is relatively easy to do with an online calculator. Looking at some examples can give you an idea of when buying points is (or isn't) worth it.

Scenario 1: Short-Term vs. Long-Term Ownership

How long you plan to stay in the home can make a difference in your total savings when buying points. Using the $350,000 mortgage example from earlier, let's consider how much you'd save if you plan to stay in the home for five years vs. 30 years. We'll assume you paid $7,000 for points which reduced your rate from 7.25% to 6.75%. All calculations use a 澳洲幸运5开奖号码历史查询:fixed mortgage rate.

Here's how the numbers add up:

• Break-even point: 4.9 years (59 months)
• Monthly mortgage payment savings: $118
• Lifetime interest savings: $118,684

If you only plan to live in the home for five years you won't fully recover the $7,000 you paid for points in savings until right before you sell. The longer you live in a home when buying points, the more savings you can realize as time goes by.

Scenario 2: Refinancing vs. Selling

Refinancing your mortgage can help you qualify for a lower interest rate, reduce your payments, or allow you to change your loan repayment term. From the previous example of selling a home after five years, you can see that it doesn't make much sense to buy points. But what about if you're replacing your existing home loan?

Let's assume that you buy your rate down to 6.75% and after five years, you owe $326,000 on the loan. After 澳洲幸运5开奖号码历史查询:shopping around for mortgage rates you decide to refinance to a new 25-year loan at 6%. Your new payment woℱuld be $2,100, a savings of🌟 $170 per month. That sounds good, but you also have to pay $3,200 in closing costs, which will take you 18 months to recover in interest savings.

Now, between what you paid for points earlier and what you paid to refinance you've sunk $10,000 into the home in closing costs alone. In this case, you have to consider whether reducing your payments from the start or when you refinance makes sense, based on how much cash you have available.

The Bottom Line

Buying 澳洲幸运5开奖号码历史查询:discount points on a mortgage can lower your interest rate and make your monthly payments more manageable, but it's to your advantage to weigh the cost against the savings. Talking to your mortgage lender or using a mortgage points calculator can help you estimate what you'll pay and when you'll break even. If you have yet to begin shopping for a loan, you can start by 澳洲幸运5开奖号码历史查询:comparing the best mortgage lenders.