What Are Mortgage Points?
Mortgage points, sometimes called discount points, are fees you pay directly to the lender at closing in exchange for a reduced interest rate. This process is also known as "buying down the rate." Essentially, you pay some interest upfront in order to receive a lower interest rate over the life of your mortgage, which could save you money in the long term.
How Mortgage Points Work
Typically, one point costs 1% of your loan amount. For example, on a $200,000 loan, one point would cost $2,000. Each point you purchase reduces the interest rate on your mortgage, effectively lowering your monthly payments as well. The exact reduction per point can vary, but it's generally about 0.25% per point.
Benefits of Buying Mortgage Points
Opting to use points can be beneficial if you plan to stay in your home for a long time. This is because the savings from your reduced interest rate will eventually surpass the upfront cost of the points. Calculating the break-even point—where your savings equal the cost of the points—will help you decide whether purchasing points is a smart financial move for you.
Considerations When Buying Points
While buying points can lower your monthly payment, it requires more cash at closing, which might not be ideal for every homeowner. Additionally, if you plan to sell or refinance your home in a few years, you might not benefit enough to justify the upfront expense. It's essential to consider your financial situation, how long you plan to keep the loan, and compare the overall costs.
Final Thoughts
Mortgage points can be a useful tool for saving money on interest over the long run. However, they require careful consideration of your financial plans and current resources. When deciding on whether to purchase points, evaluate your long-term homeownership plans, how long you intend to stay in your home, and consult with a mortgage professional to ensure it aligns with your financial goals. At Eagle Mortgage, we are here to guide you through these decisions, offering clarity and expertise to make your dream home a reality.
