A common sticking point for homebuyers is getting hung up on interest rates. But, did you know that the market interest rate doesn’t have to be the rate you get on your mortgage? With mortgage discount points, you could lower your interest rate, and monthly payment, to save over the life of your loan. One of the easiest ways to learn how much you could save is to use a free mortgage points calculator.
What are discount points on a mortgage?
Mortgage discount points are an optional upfront fee a borrower may pay to get a lower interest rate on their home loan. One discount point may lower the mortgage interest rate by as much as 0.25%—depending on product and loan characteristics—and costs one percent of the principal mortgage amount. Some people call this “buying down” your interest rate, others say it is like prepaying interest.
In addition to lowering your interest rate, buying mortgage points can help you reduce your overall monthly payment (smaller interest rate=smaller monthly payment) which can lead to serious savings over the life of your loan. Think of purchasing mortgage points as like investing in a season pass to your favorite theme park—you pay extra upfront, but you save on your cost per visit in the long haul.
How many points can you buy on a mortgage?
When it comes to purchasing mortgage points, there is a limit. Borrowers are typically allowed to purchase up to three discount points. How many points you purchase on your mortgage will hinge on your budget, loan type, and financial goals.
To decide how many points you should buy, you need to figure out what your breakeven point will be. The breakeven point is when your savings from lowering your interest rate surpasses the cost of buying the points. You can determine your breakeven point by dividing the cost of your discount points by what you will save each month.
Understanding the cost of buying down your interest rate
The total cost of buying down your interest rate will depend on how many discount points you purchase and the cost of each mortgage point is based on your loan amount. One mortgage point will cost one percent of your mortgage principle, so if you get a $400,000 mortgage, one discount point would cost $4,000 to lower your interest rate by up to 0.25% depending on your loan type.
Remember, discount points are an effective way to reduce your interest rate as long as you remain in your home or maintain your current mortgage long enough reach the breakeven point.
Maximizing your investment: When to consider purchasing discount points
As you make your decision on whether or not to purchase discount points, it’s important to assess your financial needs today as well as your future financial goals. For some homebuyers, buying mortgage points are worth it because they plan to stay in their home long term. However, homebuyers who plan to refinance or move before they breakeven may want to consider other cost saving options if they want a lower rate.
The best way to know if purchasing discount points is right for you is to connect with a mortgage expert. Your PrimeLending loan officer can answer your discount point questions and run some scenarios to help you understand all of your options. Contact a loan expert today to get started.
