Points, also called discount points, are interest payments you make upfront, when you close on your mortgage. Essentially, points are a way to pre-pay on your interest. By paying down the interest early (or “buying down the rate”), you can save thousands of dollars over the life of your loan, making points a great tool for lowering your monthly payments.
Typically, each point costs 1% of the mortgage amount. So, one point on a $200,000 mortgage would cost $2,000. Each point you purchase lowers the interest rate by .25%. If the original interest rate is 2.75%, buying one point would lower the interest rate to 2.50%.
Points can also be purchased in fractions. For example, a half point on our sample $200,000 loan would cost $1,000 and lower the interest rate by .125%.
Now, here’s the big question: does buying points make sense for you?
Let’s look at the pros and cons.
Points do not help you build equity in your home faster. Not only will you need to come up with a down payment, points can add thousands to your closing costs. And it can take years to recoup the money from the extra upfront expense. On the other hand, points are simply early interest payments, making them tax-deductible. They can lower your monthly mortgage payments as well as the total interest you’ll pay.
Bottom line—if you plan to stay in your home for at least 10 to 15 years, buying mortgage points may be worth your while, especially if
- You need lower monthly interest payments to bring the mortgage within your budget
- Your credit score disqualifies you from getting the lowest rates
- You have extra money upfront and want to take advantage of the tax deduction right away*
*Please reach out to your tax advisor for tax deduction information.
Of course, if you do have extra money up front, increasing the size of your down payment is another way to negotiate a lower interest rate and lower your monthly payments. Your Mortgage Loan Originator can help you evaluate all your options to find the perfect solution for you.