As you plan your mortgage loan, you'll encounter a number of different options—things like how much to borrow, various interest rates, private mortgage insurance, sizes of down payments, and term lengths.
One choice you may be able to make is whether or not to buy points. What are mortgage points? When might they be a key to lower costs? And when might you choose other savings options? Here's what you need to know.
What Are Points?
Mortgage points refer to an offer to reduce your interest rate over the length of the loan by paying a certain additional amount upfront. One point is generally equivalent to 1% of your mortgaged amounts. In return, the point equates to a certain percentage of rate reduction. If you have a loan for $500,000 at 5.2%, for instance, a point may cost $5,000 and reduce the interest rate to 5%.
When Are Points Valuable?
Spending several thousand dollars to reduce the interest rate just a small amount may not seem worth it. However, calculate that savings over the life of a 30-year mortgage, and you have significant savings. If you didn't qualify for a better interest rate due to things like bruised credit, this may still allow you to get that low rate.
Of course, you may also need to have the cash available at signing to buy points. Some buyers hold back a bit from their down payment plan in order to buy down the interest rate during closing.
When Might You Skip Points?
Buying points, as mentioned, requires cash (or a higher refinanced amount), so it's not for everyone. If the additional outlay of money would leave your liquid assets dangerously underfunded in case of emergency, you may do better to hold onto it and plan to refinance later.
In addition, crunch the numbers to see how many months it will be before the added cost of buying points actually results in overall savings in the loan's costs. If you may not keep the home past this time frame, it may not result in real savings. In this case, putting that money into a larger down payment might be a better path to savings.
Where Can You Learn More?
Points, like many other aspects of mortgage shopping, can be somewhat confusing. The best place to begin is by consulting with an experienced mortgage agent in your state. With their guidance and expertise, you'll make the best choice for a happy and financially profitable chapter as a homeowner.