What Are Mortgage Points and Are They Worth Paying For?
Right now is an ideal time to buy a new home. With interest rates at historic lows, there’s no time like the present to save money on a new mortgage. But at Rivermark Community Credit Union, we want to save you as much money as possible. Who doesn’t like having more money in their wallet?
Many members who close on a home mortgage with us wonder about mortgage points and whether you really save more in the long run by purchasing mortgage points upfront. If you’re new to the home-buying process, you may even be wondering what mortgage points are.
Rivermark Community Credit Union is here to help. We’ll explain everything you need to know about mortgage points and help you figure out if they’re actually worth paying for.
What Are Mortgage Points?
In a nutshell, mortgage points are something you pay for upfront in order to save yourself money down the line. The way it works is, for each point you buy at closing, your overall interest rate will be reduced. Essentially, you’re prepaying the interest on your mortgage with the idea that it will save you money in the long-term. Think of it as an investment. The money you spend now will reduce the amount you pay over the life of your loan.
So how exactly does it work? Each point typically costs you 1% of your total loan amount. For instance, let’s say you find a home for $250,000 and are prepared to pay a 20% down payment on that home. After you pay your down payment and closing costs, you’re only looking to borrow $200,000. In this scenario, one mortgage point would cost you $2,000, which is 1% of the total amount of your loan.
Now, you’re probably wondering how much of an interest rate deduction each mortgage point is going to get you. Excellent question and the answer varies by lender. That’s why it’s important to do your research before selecting your home mortgage lender. A standard interest rate deduction is a quarter of a percentage point for each mortgage point paid, so we’ll use that for our example here.
That means if you’re approved for a home mortgage at an interest rate of 4.00% and you purchase one mortgage point for $2,000, as outlined in the example above, your reduced interest rate will be 3.75%. You’re probably trying to figure out how much money that will save you and whether it’s worth it to purchase mortgage points based on your projected savings. That leads us to our next point.
What Do You Need to Know?
One of the most important things you need to know in determining whether to purchase mortgage points is what your breakeven point will be. Let’s stick with the example we’ve been using. Your breakeven point is how much time has to go by before you save the amount of money you spent upfront on purchasing the mortgage points. So let’s crunch the numbers.
Using the same example as before, you decide to buy one mortgage point for $2,000. This lowers your 4.00% interest rate by a quarter percentage point to 3.75%. Using our mortgage calculator, we see that at a 4.00% interest rate on a 15-year home mortgage for $200,000, your monthly payments would be around $1,479. But if you lower your interest rate by purchasing a mortgage point, your new monthly payment is around $1,454. This saves you $25 a month.
Now we have to figure out your breakeven point. In other words, how much time needs to pass for you to earn back the money spent on that initial mortgage point. Sticking with our example, you would be saving $300 a year with the lower interest rate. So it would be just over six and a half years, or 80 months until you reach your breakeven point.
Should You Buy Mortgage Points?
Whether or not you buy mortgage points depends on a number of factors. One of the most important is how long you intend to stay in the home. If you want to start a family, for instance, and plan on upgrading to a larger home in a few years, then mortgage points probably aren’t the best option for you. On the other hand, if you’ve found your dream home and know that you want to settle there permanently, mortgage points could be a great way for you to lower your interest rate and save money over time.
One of the most important things to do is crunch the numbers and comparison shop between lenders. For instance, each lender will vary in how much of an interest rate deduction is offered per percentage point you buy.
Also, in our example, we used a 15-year mortgage term. But you may opt for a 30-year mortgage instead. Or you may decide you want to purchase two or three mortgage points instead of just one. Whatever you decide, grab your handy calculator and run the numbers. This will help you find your breakeven point so you can decide whether purchasing mortgage points would be worth it for you.
Consider Other Options
You should also consider alternative options for lowering your interest rate. For example, if you don’t have the best credit right now but feel you’re on your way toward improving it, then refinancing your mortgage down the road might be something to think about instead. When you refinance your mortgage, you pay off the existing home loan and start over with a new one, typically at a lower interest rate.
Another option would be to save the money that you would be spending on mortgage points and instead make a larger down payment on your home so that the total amount of your loan is lowered.
If you can’t decide between buying mortgage points, making a larger down payment, or saving your money now and refinancing later, come talk to one of our financial experts. You can contact us or make an appointment to visit us at one of our branch locations.
One of our goals at Rivermark is to provide our members with the best guidance possible. So let us crunch the numbers to figure out the best way to help you do just that.