MORTGAGE BLOGPOST TAGS
Blog posted On January 29, 2019
Mortgage points or discount points are fees paid to the lender at closing to buy down the interest rate. One point is equal to 1% of the total loan amount. As mortgage rates gradually rise, the practice of buying mortgage points may start to become popular. Whether or not points will benefit you financially depends on how long you plan on staying in your home, and your loan.
To determine if you would benefit from buying points, calculate how long it would take to recoup the upfront cost or find the breakeven point, and compare that to how long you will live in your home. If you plan on moving or refinancing your mortgage before the breakeven point, points may not be the best option. If you expect to live in the home, with the same mortgage, past the breakeven point, and have the extra cash at closing, buying mortgage points could be a chance to save some money on your mortgage. Today, most home buyers do not stay in their loan for the full duration of its terms and will refinance their loan for a lower rate, better terms, or for other reasons. Other borrowers will not occupy their homes for the full duration of their loan term. According to the National Association of Realtors, since the 2008 Recession, the average time a homeowner occupies a home is approximately nine years. Borrowers who will not stay in the home or loan long enough to recoup the cost of points might consider applying extra funds toward the down payment instead, another way to lower the interest rate.
Compare the scenario below:
Scenario
Mortgage Loan Amount |
$200,000 |
|---|---|
Loan Terms |
30-Year Fixed-Rate |
Interest Rate without Points |
5% |
Mortgage Points Purchased |
1 |
Interest Rate with Points |
4.75% |
Results
Breakeven Period |
8.3 Years |
|---|---|
Payment Required to Buy Points |
$2,000 |
Monthly Mortgage Payment with Points |
$1043 |
Monthly Mortgage Payment without Points |
$1063 |
In the scenario above, if the home buyer plans to stay in the home without refinancing the mortgage for more than 8.3 years, and have an extra $2,000 to spend at closing, buying points could be a good option. If they do not plan on staying in the home 8.3 years, or plan to refinance the mortgage, it may be more effective to put the extra $2,000 toward the down payment instead. If you put the money toward the down payment, you reduce the balance you are borrowing and accept the higher interest rate. If you put the money toward points, you reduce the interest rate but have a higher loan balance.
In most cases, it takes about five to seven years for a borrower who buys mortgage points to break even. If you have any questions about mortgage points and how it could benefit your home purchase, consult me and compare scenarios.
Sources: CNBC, NerdWallet
