December 2nd, 2019 10:02 AM by Jackie A. Graves, President
points are fees that you pay your mortgage lender up-front in order to reduce
the interest rate on your loan and your monthly payments. A single mortgage
point equals 1% of your mortgage amount. So if you take out a $200,000
mortgage, a point equals $2,000. So if you can afford to make these payments
now, you can reduce what you’ll pay in the long-run. But it’s not the right
move for everyone. As you decide if paying mortgage points makes sense for you,
you may also want to find a financial advisor who can guide you in making the
home-buying process easy and rewarding.
Before you know if and when to buy mortgage points, you
need to understand what they are and how they work.
Mortgage points essentially are special payments that you make
at the closing of your mortgage in exchange for a lower interest rate and
monthly payments on your loan. That’s why buying points is often referred to as
“buying down the rate.” The move can lower what you pay your mortgage lender in
the long-run, and it can also get you closer to owning your own home outright
In the housing world, there are two types of mortgage points.
Discount points: These are basically mortgage points as described above. The
more points you buy, the more your rate falls. Lenders set their own mortgage
point framework. So the depth of how far you can dip your rate ultimately depends
on your lender’s terms, the type of loan and the overall housing market. But
you can expect to lower yours by one-eighth to one-quarter of a percent.
Origination Points: These cover the expenses your lender made for getting your
loan processed. The amount of interest you can shave off with discount points
can vary, but you can typically negotiate the terms with your lender. These are
part of overall closing costs.
If you can’t afford to make large up-front payments at the
closing of your mortgage application, you may want to keep the current interest
rate and refinance your mortgage at a later date. Refinancing a
mortgage is basically taking out a new loan to pay off your first
mortgage, but you shop for a better interest rate and terms on the new one.
This makes sense if you’ve made timely payments on your old mortgage, have paid
off a decent amount of your principal, and improved your credit score since you
first obtained the initial mortgage.
But if you have some money in reserves and you can afford to
make up-front payments, buying mortgage points may suit you. In general, buying
mortgage points is most beneficial when you intend to stay in your home for a
long time and if you can afford large mortgage point payments.
If this is the case for you, it helps to first crunch the
numbers to see if mortgage points are truly worth it.
Picture this scenario. You take out a 30-year-fixed-rate
mortgage for $200,000 with an interest rate at 5.5%. Your monthly
payment with no points translates to $1,136.
Now, say you buy two mortgage points (1% of the loan amount
each) for $4,000. As a result, your interest rate dips to 5%. You end up saving
$62 a month because your new monthly payment drops to $1,074.
To figure out when you’d get that money back and start saving,
divide the amount you paid your points for by the amount of monthly savings
($4,000/$62). The result is 64.5 months. So if you stay in your home longer
than this, you save money in the long run.
But keep in mind our example covers only the principal and
interest of your loan. It doesn’t account for factors like property taxes. To
get a real picture of how your monthly payments break down, use our mortgage calculator.
As you can see, there are some short-term benefits to paying
more now. But there are other reasons why some people find mortgage points
attractive. We’ll explore these.
If you are buying a home and have some extra cash to add to
your down payment, you can consider
buying down the rate. This would lower your payments going forward. This is
also a good strategy if the seller is willing to pay some closing costs. Often,
the process counts points under the seller-paid costs. And if you pay them
yourself, mortgage points usually end up tax deductible.
In many refinance cases, closing costs are rolled into the
new loan. If you have enough home equity to absorb
higher costs, you can pay mortgage points. Then you can finance them into the
loan and lower your monthly payment without paying out of pocket.
To cut down on your closings costs, you can use negative
mortgage points instead of positive ones. As a result, however, you’ll be
paying more interest.
If you plan to keep your home for a while, it would be
smart to pay points to lower your rate. Paying $2,000 may seem like a
steep charge to lower your rate and payment by a small amount. But, if you save
$20 on your monthly payment, you will recoup the cost in a little more than
If you expect to make payments on a 30-year loan all the way to
maturity, paying points can be a wise financial move.
The lower the rate you can secure upfront, the less likely you
are to want to refinance in the future.
Even if you pay no points, every time you refinance, you will incur charges. In
a low-rate environment, paying points to get the absolute best rate makes
sense. You will never want to
refinance that loan again.
But when rates are higher, it would actually be better not to
buy down the rate. If rates drop in the future, you may have a chance to
refinance before you would have fully taken advantage of the points you paid
Why do so many lenders quote an origination fee? To get a true
“no point” loan, they must disclose a 1% fee and then give a corresponding 1%
rebate. Wouldn’t it make more sense to quote a loan “at par” and let the
borrower buy down the rate if they so choose?
The reason lenders do it this way is the new disclosure laws
that came about with the Dodd-Frank financial reform bill in 2010. If the
lender does not disclose a certain fee in the beginning, it cannot add that fee
on later. If a lender discloses a loan estimate before locking in the loan
terms, failure to disclose an origination fee (or points) will bind the lender
to those terms.
This may sound like a good thing. If rates rise during the loan
process, it can force you to take a higher rate. Suppose you applied for a loan
when the rate was 4.5%. When you are ready to lock in, the rate is worse.
Your loan officer says you can
get 4.625% or 4.5% with a cost of a quarter of a point (0.25%).
But if no points or origination charges show up on your loan
estimate, the lender wouldn’t be able to offer you this second option. You
would be forced to take the higher rate.
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