December 11, 2019

3 Reasons Mortgage Points Don’t Always Add Up

When it comes to mortgages, points are not always the kind you want to score. Perhaps you’ve seen a low advertised rate, only to find it is based on the purchase of points. They may sound fun and cheery (especially when preceded by the word “discount.”) But how do you know if points are worth buying?

What are Mortgage Points?

Points are offered by your lender as a way of paying interest upfront and reducing the rate on a loan. The cost of one point is typically equal to 1% of the total loan. And, in most cases, each point will lower your interest rate by 0.25 percent.

Say you are taking out a $200,000 mortgage. One point would cost $2,000. Assuming 4.25% is the going rate, your mortgage rate is lowered to 4% with the purchase of one point. Over the life of a 30-year fixed rate loan, you save a little over $10,000 in interest. Each month, you would be saving about $29 on your payments.

Savings, savings, savings. Good deal, right? Not so fast. Consider the following before deciding if points are right for you.

Life of the Loan

How long do you plan on staying in your home? While you may not know the answer precisely, you can figure out the number of years before breaking even on mortgage points. In the example given above, it would take close to 6 years before the $29/month savings equals $2,000 in upfront costs. Generally, the shorter amount of time you plan on staying in the home, the less likely it is that points will present you any true savings.

Down Payment

How much are you prepared to spend at closing? In the most glaring example, say the $2,000 you spend on points could make or break putting 20% down. In this instance, the amount spent on PMI every month would negate the savings in interest.

Whether you are considering putting 5, 10, or 20% down, there is something to be said for the significance of a higher down payment versus lower rate. A lender is the perfect person to walk you through these calculations.

Type of Loan

Are you considering an ARM? The discounted rate received in exchange for mortgage points will only apply to the initial fixed-rate period. If this period is 5-7 years, it is rather unlikely that you will reap any savings before your rate is adjusted. On the contrary, a 10-year ARM could give you enough time to recoup your upfront investment.

Mortgage points, break-even-points, down payments, and rates…Oh my! These are a lot of numbers to consider on your own, we know. Spend 5 minutes with one of our mortgage experts to see how you can save $5,000 or more in interest and fees. 

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