Should You Buy Mortgage Points?

Are you currently getting a loan to purchase a home, and your lender is asking you if you want to purchase mortgage points? It will help to know more about mortgage points before you make a decision.

What Are Mortgage Points?

When you buy a mortgage point, you are essentially prepaying for interest on your loan at a much cheaper rate. The way it works is that you pay 1% of your loan's value, not your home's value, in exchange for receiving a reduction of .25% from your mortgage's interest rate. This allows you to provide more money up front in exchange for long-term savings.

There is no hard limit to how many mortgage points you can purchase, since it depends on what each lender decides that they want to do. For example, your lender may not allow you to buy more than 4 mortgage points for a reduction of 1% of your interest rate. 

When Should You Purchase Mortgage Points?

Purchasing mortgage points can be worthwhile if you know that you will stay in your home for a very long time. That is because there is a break-even point where buying the mortgage points will be worth it. In order to determine that break-even point, you must look at two factors.

You first need to decide how long you are going to stay in the home. If your mortgage lender tells you that it will take five years to break even on purchasing your mortgage points, then you will be taking a loss if you end up selling before five years. However, the time after five years will turn those mortgage points into a good investment.

It's also important to consider what you would do with the money spent on mortgage points. Some people prefer to put that money toward the down payment, which will reduce their loan amount from day one and give them instant equity. Another option is to invest that money in another way that can potentially lead to making more money than what you'd save on your interest rate. 

What Happens If You Refinance Your Loan? 

Any time you refinance your home, you are essentially getting a brand new loan and closing out your old one. This means that the mortgage points that you purchased will not transfer to your new mortgage, even though you're living in the same home. That's why it's so important to think about how long you are going to stay in the home with the exact same loan. 

Contact a mortgage lender near you to learn more.

About Me

Keeping Your Financial Wits About You

A few months ago, I realized that maintaining a healthy financial situation was about more than simply making a budget and sticking to it. It was also about being able to stay calm and think rationally when you came across something you really wanted to buy, also known as impulse buys, if you will. I started focusing on identifying and avoiding impulse buys, and it made a huge difference in my personal and financial life. I was able to think more rationally about what I wanted and why, and I was really pleased with how much easier it made my finances. This blog is all about keeping your financial wits about you.