How much can you save by buying mortgage points?
Homebuyers looking for some relief will have to wait a bit longer.
That seemed to be the message earlier in April as the latest inflation report from the Bureau of Labor Statistics showed inflation rising again in March for the second month. That report significantly dimmed hopes that the Federal Reserve would cut interest rates in response to cooling inflation. And while the Fed doesn't directly set mortgage rates, an elevated Federal Funds rate will do little to help homebuyers.
With the average mortgage interest rate hovering near its highest point since 2000, then, some buyers may be considering alternative ways to reduce costs. One of the more effective ways involves purchasing mortgage points. Mortgage points are a fee that a buyer pays a lender to secure a lower rate. So, think 7.25% for a 30-year mortgage loan right now without points or 6.75% or lower with them tacked on. To better understand the value of mortgage points in today's market, it helps to know how much you could save by pursuing this option.
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How much can you save by buying mortgage points?
The amount of money you can save by purchasing mortgage points will vary based on a few factors. Savings are dependent on the mortgage amount in question as well as the interest rate you're "buying down" (for the below calculations we'll use today's 7.29% average for a 30-year loan). The amount and the cost of points (typically each point costs 1% of your total mortgage loan) will also factor in.
With those factors in mind, here's how much you stand to save by buying mortgage points for a $431,000 home (the average price of a home now):
4 mortgage points (1 full point lower)
- Cost of points: $17,240
- Rate: 6.29%
- Monthly payment with the 4 points: $2,665.00
- Monthly payment without points: $2,952.00
- Monthly savings: $287.00
3 mortgage points (75 basis points lower)
- Cost of points: $12,930
- Rate: 6.54%
- Monthly payment with the 3 points: $2,736.00
- Monthly payment without points: $2,952.00
- Monthly savings: $216.00
2 mortgage points (50 basis points lower)
- Cost of points: $8,620
- Rate: 6.79%
- Monthly payment with the 3 points: $2,807.00
- Monthly payment without points: $2,952.00
- Monthly savings: $145.00
1 mortgage point (25 basis points lower)
- Cost of points: $4,310
- Rate: 7.04%
- Monthly payment with the 3 points: $2,879.00
- Monthly payment without points: $2,952.00
- Monthly savings: $73.00
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Other considerations
As the above calculations illustrate, mortgage points could result in substantial monthly and annual savings for homeowners. It's important to note that the above figures assume a buyer wouldn't put a down payment on the home. If they do (most lenders want 20%), that total mortgage loan amount would drop and the the monthly costs would be lower.
Like mortgage refinancing, however, it's also critical that borrowers weigh the costs of any mortgage points against the time it takes to break even. Points can generally be paid upfront at closing or rolled into the overall mortgage loan. Buyers will want to plan on staying in the home they're purchasing long enough to recuperate those mortgage point costs. If they move before then, the monthly savings won't make up for the costs they had to pay out of pocket to get that lower rate.
Finally, it's crucial to understand the mortgage rate environment before taking this step. Mortgage rates change daily and are affected by a variety of factors. If you time your mortgage application well (an inherently riskier move), you could secure a lower mortgage rate simply by locking it in when rates fall versus buying those points in advance. It's a calculated risk, but one that may be worth it for the right homebuyer.
The bottom line
In today's mortgage rate climate, every extra dollar helps. And mortgage points can help keep more of those dollars in your pocket, albeit with an upfront cost. But if you're looking for ways to save on monthly mortgage payments, this is a safe and viable way to do so, potentially allowing you to save hundreds of dollars monthly. Just make sure to carefully weigh the pros and cons of this strategy to make sure it's the best one for your financial situation.
