Understanding Mortgage Points: What They Are and How They Save You Money
When shopping for a mortgage, you might hear the term “mortgage points” thrown around. But what exactly are mortgage points, and how can they save you money? As Big Mike—Everybody’s Broker, I’m here to break it down and explain how using mortgage points could be a smart way to lower your monthly payments and save on interest in the long run.
What Are Mortgage Points?
Mortgage points, also known as discount points, are fees you pay directly to the lender at closing in exchange for a lower interest rate. Essentially, you’re prepaying some of the interest on the loan upfront. This can reduce your monthly payments and save you money over the life of your mortgage.
1 point = 1% of your loan amount. For example, if you’re taking out a $200,000 loan, one point would cost you $2,000.
Each point typically lowers your interest rate by about 0.25%, though this can vary by lender.
How Do Mortgage Points Save You Money?
By paying for points upfront, you secure a lower interest rate for the entire loan term. While paying more at closing might seem like a financial burden, the long-term savings can be substantial.
Let’s break it down with an example:
Say you’re borrowing $200,000 with a 30-year fixed-rate mortgage at 4.5% interest. Without points, your monthly payment (excluding taxes and insurance) would be about $1,013.
If you buy 1 point (costing you $2,000), and it lowers your interest rate to 4.25%, your new monthly payment would drop to around $983. Over the course of 30 years, you’d save roughly $10,800 in interest, making the upfront cost well worth it.
When Should You Buy Mortgage Points?
Buying points makes sense if:
You plan to stay in the home for a long time. The longer you keep your mortgage, the more you’ll benefit from the lower interest rate.
You can afford the upfront cost. Points require an upfront investment, so make sure you have the cash on hand to cover them at closing.
You want to reduce your monthly payment. If lowering your monthly payment is important for your budget, points can help you achieve that.
How to Calculate Your Break-Even Point
To determine if mortgage points are right for you, calculate your break-even point—the time it takes for the savings from the lower interest rate to cover the cost of the points.
Using the example above, if paying $2,000 saves you $30 a month, divide $2,000 by $30. It would take about 67 months, or a little over 5 years, to break even. After that, you’d be saving money every month.
When Should You Skip Mortgage Points?
While mortgage points can be a great way to save, they’re not for everyone. You might want to skip them if:
You plan to sell or refinance soon. If you won’t be keeping the mortgage long enough to reach the break-even point, you won’t see the savings.
You don’t have extra cash at closing. If your budget is tight, you may want to keep your upfront costs lower and avoid buying points.
Big Mike’s Take: Let’s See If Mortgage Points Work for You
Mortgage points can be a great tool to lower your interest rate and save money, but they’re not always the best choice for every buyer. That’s why I’m here to guide you through the process and help you decide if paying for points is the right move for your financial situation.
Thinking about buying points or have more questions? Contact Big Mike today, and let’s work together to make the smartest decision for your mortgage!
