Are mortgage points worth it?
Interest rates are currently at a 22-year high, and the mortgage rates most borrowers can get in today's economy aren't far off. As of August 15, the average rate for a 30-year loan was 7.51%. Considering that rates for the same loan were about 3% just a few years ago, it's clear that today's rate environment isn't for everyone.
That said, sometimes the ideal scenario is out of reach, and you'll need to purchase a home anyway, even with rates being as high as they are. While there are still some benefits to buying a home now, many borrowers will be served best by thoroughly exploring their options before signing on the dotted line. This includes understanding what mortgage points are and how they could be beneficial in today's high-rate environment.
Start by exploring your mortgage interest rate options here now so you know what to expect.
Are mortgage points worth it?
Before trying to determine if mortgage points are worth it, it's first important to know exactly what mortgage points are and how they work.
What are mortgage points?
"Mortgage points" are the fees banks and lending institutions charge borrowers to secure a lower interest rate. In exchange for this fee, borrowers can generally secure a lower interest rate (typically worth a portion of a point) than they would have gotten if they had taken the loan they were offered without it.
For example, in today's climate, qualified borrowers may be able to get a rate of 7%, but if they pay for points, they could potentially get a 6.75% rate instead. There is a limit to how much lower your rate could be, however.
So, for example, in today's rate environment, you won't be able to buy points to get your rate to a 2% to 3% range. But it could potentially save you significant sums of interest over the life of the loan that you otherwise would have paid.
Explore today's mortgage rates here now to learn more.
Benefits to using mortgage points
Because mortgage points allow you to get a lower interest rate, you'll then secure a lower monthly mortgage payment. This is always beneficial — but arguably more so in today's rate climate. The money that you save on your monthly mortgage can then be redirected in any number of ways, from working on home renovations, to saving, to potentially even buying a more expensive house.
You could also feel comfortable putting a smaller down payment on your home purchase knowing that the points you purchased will still result in a better monthly payment. Like all financial considerations, however, the benefits of mortgage points are specific to the borrower. So make sure you've spoke to your mortgage lender — and carefully crunched the numbers — before agreeing to go this route.
Other considerations
The cost of mortgage points could be high (think thousands of dollars, either at closing or included with the amount of money you're borrowing).
That said, you'll want to make sure it's truly worth it. You don't want to spend a certain amount of money securing the lower mortgage if you don't plan on staying in the home long enough to recuperate that expense. So if you're planning on buying a home now — but only staying there for a short time frame — it may not make sense to buy points.
You also may decide that buying mortgage points isn't worth it even in today's climate. Most current purchasers are planning to complete an eventual mortgage refinance when rates inevitably fall again.
But mortgage refinancing comes with its own closing costs. In this scenario, it won't make sense to pay to secure a half point lower via mortgage points now — only to pay closing costs for a refinance in another 12 to 18 months. So make sure the rate you can get with mortgage points is comparable to the one you ultimately want to refinance to. Otherwise, it may not be cost-effective.
Explore your mortgage interest rate options here now to learn more.
