Should you buy mortgage points?
When you're shopping for a mortgage, you'll eventually come across the term mortgage points. Of all the elements in the mortgage process, this is one of the terms that can confuse borrowers the most. But it doesn't have to.
Simply put, mortgage points are fees paid to a lender in exchange for a lower interest rate on a mortgage loan. You can buy them when you take out a new mortgage or refinance an existing mortgage. You either pay for these points upfront at closing or have them rolled into the total cost of the mortgage.
Mortgage points can save you money in the long term, but they're not the best choice for every borrower. To determine whether you should buy them, you'll need to consider a few different factors.
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Should you buy mortgage points?
Here's what you should keep in mind when weighing whether or not to buy mortgage points.
How do mortgage points work?
To decide if mortgage points are worth it for you, it's essential to first understand how they work.
One mortgage point equals 1% of your mortgage amount. So, if your mortgage is $200,000, one point would cost $2,000.
In exchange for this fee, your lender will lower your mortgage interest rate by a certain amount, typically 0.25%. So, if your interest rate is 5.5% and you purchase one mortgage point, the lender may lower your rate to 5.25%.
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Pros of buying mortgage points
The main advantage of buying mortgage points is lowering your monthly mortgage payments and reducing the overall cost of your loan.
Depending on your interest rate and loan term, you could potentially save thousands of dollars in interest payments, making the cost of homeownership more manageable. This can be especially helpful if you plan to stay in your home for five years or more and will have the time to recoup the cost of the points.
Additionally, mortgage points are tax-deductible, so you may be able to deduct the cost on your income taxes if you meet certain criteria.
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Cons of buying mortgage points
One of the biggest drawbacks of buying mortgage points is the cost, which could strain your budget. If you need to conserve cash for other expenses, like home repairs or moving costs, you may not want to spend thousands of dollars on mortgage points.
Another factor to keep in mind is the breakeven point. This is the point at which the savings from your reduced interest rate offset the cost of the mortgage points. Depending on how many points you purchase, it could take several years to reach this point. If you don't plan on staying in your home for more than a few years, you may not save enough on your monthly payments to make the cost of mortgage points worth it.
It's also important to note that not all lenders offer mortgage points. So if you're considering this strategy, shop around and compare multiple lenders to see if it's available to you. Additionally, make sure you understand all the terms and conditions of the points before you commit. Some lenders have restrictions on how many points you can buy or may require a minimum credit score to be eligible.
The bottom line
So, should you buy mortgage points? The answer is, it depends. What it ultimately comes down to is your personal financial situation, how much you can afford to spend and your homeownership plans.
If you have the cash available and plan to stay in your home for five years or more, buying mortgage points can be a smart decision. It can save you money on interest payments over the life of your loan and potentially lower your monthly mortgage payment.
However, the upfront cost of mortgage points can be a significant financial burden and may not be worth it if you plan on moving soon or can't afford the added expense. Be sure to weigh the pros and cons before making a decision, and speak to your lender about what makes the most sense for you.
