Mortgage Points: Guide to Buying Down Interest Rates
High mortgage rates got you down? You can lift your spirits and “buy” a lower rate by paying for mortgage points. The upfront fee will result in month-to-month savings that may seem small, but the reduced interest costs over your loan term should put a smile on your face.
The catch: Mortgage points mean you’ll dish out more cash at the closing table. Still, there’s an opportunity for someone else to pay for the points on your behalf if you know how they work and how to haggle.
What are points on a mortgage?
Mortgage points — also known as discount points — are upfront fees you pay to your lender to “buy” a lower interest rate.
How much do mortgage points cost?
Mortgage points are calculated as a percentage of your loan amount: One point equals 1% of the amount you borrow. For example, one point on a $350,000 loan would cost you $3,500 ($350,000 x 0.01 = $3,500).
How do mortgage points work?
Mortgage points shave off fractions of a percent from your rate, which can save you thousands of dollars on a 30-year mortgage. You’ll typically reduce your interest rate by 0.25 percentage points for every discount point you buy.
On the surface, the rate and payment savings don’t look very impressive. But when you consider lifetime savings, discount points become more appealing. The example below compares options on a 30-year fixed-rate mortgage with a $350,000 loan amount, assuming the borrower was quoted a 6.5% rate with no points.
|Discount point cost
|Monthly principal and interest payment
|Lifetime interest paid
How much will I save if I pay mortgage points?
In the example above, you’ll save:
- $57.23 to $113.81 per month. The payment drop may not give you bragging rights at the neighborhood block party, but the extra $600 to $1,300 each year could buy you an upgraded appliance or new furniture for a child’s room.
- $20,602.04 to $40,972.05 over 30 years. The savings really add up over time. If you’re in your forever home, discount points may be worth the cost.
But not all points are created equal, so you should rate shop with at least three lenders. One important note: Any points you find listed on Page 2, Section A of your loan estimate or closing disclosure must “buy” you a lower interest rate by law, according to the Consumer Financial Protection Bureau (CFPB). If they don’t, pick a different lender — you may be getting scammed.
What’s the benefit of buying mortgage points?
Buying discount points gives you both immediate and long-term perks that include:
A lower mortgage payment. The extra cash you save each month can be added to your college tuition budget, retirement account or an emergency fund.
Less interest in the long haul. As the example above shows, paying less interest over time can add up to a new vehicle, a down payment on a vacation home or that dream family trip to Europe.
When should you buy mortgage points?
Mortgage points aren’t cheap, especially if you’re borrowing a lot of money. In most cases, it makes sense to pay for points if:
Your closing costs are being paid by the seller. If you’ve haggled for the seller to pay some of your costs, set aside a chunk to buy a lower rate on the seller’s dime.
You’ll recoup the cost before you sell your home. Divide the cost of the points you’re buying by your monthly savings to learn how many months it’ll take to hit your break-even point. It doesn’t make sense to pay for points if you won’t be in the home long enough to enjoy the savings.
When to avoid buying mortgage points
Don’t spend the money on discount points if:
You’re strapped for cash. Homeownership comes with the downside of leaky roof repairs, toilet clogs and upkeep, all of which costs money. If your rainy-day fund can only handle a sprinkle, put the cash you would spend on discount points into your emergency fund or pay off debt instead.
You plan to sell your home soon. If you’re a year or two away from selling your home, or won’t be there long enough to break even on point costs, skip the points and keep the cash for moving expenses or a larger down payment on your next home.
Tip to help save up for mortgage points
When mortgage rates are high, savings rates tend to be high, too. If you need to save up for mortgage points, why not move some cash into a high-yield savings account? You can quickly build up your down payment fund with the extra interest you earn. Compare deposit accounts offered by LendingTree partners.