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You can purchase mortgage points when you buy a home or refinance your mortgage. Buying points is the same as prepaying interest on your loan, and lenders will give you a lower interest rate in exchange. The lower rate can decrease your monthly payment and, depending on how long you have the mortgage, might save you money overall. However, buying points isn't always a good idea. Read on to find out if buying mortgage points is right for you.
What Are Mortgage Points?
Mortgage points are a form of prepaid interest that you pay for with your closing costs on a new mortgage.
Buying points is a bit of a trade-off. You can permanently lower your loan's interest rate, but you need to pay for the points when you close on your loan or roll the amount into your mortgage.
To decide if buying points is a good idea, you can calculate your break-even point to find out when your monthly savings add up to your upfront costs.
Types of Mortgage Points
You might encounter two types of points when you're getting a new mortgage: discount points and origination points.
- Discount points: Mortgage points generally refer to discount points. You usually have to pay 1% of your loan amount per discount point, and each point lowers your interest rate by 0.25%. You may be able to purchase part of a point to decrease your interest rate by increments of 0.125%.
- Origination points: The origination points on a mortgage are an upfront loan origination fee. The fee is generally about 0.5% to 1% of the loan amount, and it gets added to your closing costs. You might be able to shop around or negotiate with your lender to get a lower fee.
Learn more >> The Complete Guide on How to Get a Mortgage
Benefits of Buying Mortgage Points
Buying mortgage points can offer several benefits:
- Lower your interest rate: Buying mortgage points can lower your monthly payment, which could lead to significant savings over time. Even a small decrease in your rate can add up if you have a large mortgage balance.
- Lower your monthly payment: The lower interest rate will also lead to a lower monthly payment, freeing up money for the other costs that come with owning a home. A lower monthly payment also leads to a lower debt-to-income ratio (DTI), which can help you qualify for loans and lines of credit with better terms.
- Potential tax benefits: You may be able to deduct your mortgage point payment on your taxes if you itemize your deductions. However, there are some eligibility requirements, and some homeowners need to spread out the deduction over the lifetime of the loan instead of deducting the full amount the first year.
Drawbacks of Buying Mortgage Points
There are also a few reasons to pass on mortgage points:
- Might not break even: You might not recoup your upfront costs if you sell your home or refinance your mortgage within a few years.
- Can be expensive: For example, even if you put 20% down on a $1 million home, each point could cost you $8,000. You might be able to roll the cost into your loan, but then it will start accruing interest.
- Leaves you with less cash: Purchasing mortgage points also leaves you with less money for moving, repairs, improvements, maintenance and other expenses. You might want to keep more cash on hand if you don't have an emergency fund.
Should You Buy Mortgage Points?
You may want to buy mortgage points if:
- You calculate your break-even point and think you'll save money overall.
- The lower monthly payment will help you qualify for the loan.
- The seller is offering concessions and will pay for the points on your behalf.
You can find your break-even point by dividing your upfront costs by the monthly savings. Here's an example based on a $350,000 mortgage with a 6% interest rate.
| Buying Mortgage Points on a $350,000 Mortgage | |||||
|---|---|---|---|---|---|
| 0 Points | 1 Points | 2 Points | |||
| Interest Rate | 6% | 5.75% | 5.5% | ||
| Upfront Cost | $0 | $3,500 | $7,000 | ||
| Monthly Payment | $2,098 | $2,043 | $1,987 | ||
| Monthly Savings | $0 | $55 | $111 | ||
| Time to Break Even | 0 months | 64 months | 63 months | ||
In these examples, you won't break even until 63 to 64 months after closing on the home. If you think you'll refinance or move in the next five to six years, paying for points might wind up costing you money overall.
You can use Experian's mortgage calculator to figure out how much your monthly payment will change if you buy points and lower your interest rate. Remember, each point usually costs 1% of the loan amount, not the purchase price.
Learn more >> Are Mortgage Points Worth It?
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†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
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How to Buy Mortgage Points
You'll need to work with your loan officer or broker to buy points when you get a mortgage. You might be able to choose from several offers with varying amounts of points and different interest rates.
It's also important to review the fine print when you're comparing mortgage offers to make sure you're making an apples-to-apples comparison. Even if you don't ask to purchase points, some mortgage lenders may advertise or offer you a loan that includes mortgage points.
You can additionally ask about lender credits, which function a little like the reverse of mortgage points. In exchange for receiving a higher interest rate, the lender gives you credits that can offset your closing costs to lower your upfront expenses.
Improving Your Credit Can Also Get You a Lower Rate
Purchasing mortgage points can lower your interest rate and might save you money, but lenders consider many factors when setting the interest rate on your loan. For example, improving your credit scores can also help you qualify for a mortgage and a lower rate.
You can get your credit report and FICO® Score☉ for free from Experian, and get insights on the factors that are hurting your scores the most. If you have time, try to improve your score before you start shopping for a mortgage.