What’s the Point?

What’s the Point

As I’ve mentioned many times in this blog before, buyers should be aware of every option they have when looking at mortgage products. Prices can differ greatly by institution and fees can as well. If you don’t ask, you might miss an unadvertised discount or advantage. Recently I had two buyers that each were looking for mortgages that offered buy downs up front in order to have lower monthly payments. They intended to stay in the home a long time, so it made sense to secure a lower rate over time. With that said, below is a concise, easy to understand synopsis of mortgage points, known as a buy down or discount. 

Buying points on a mortgage, also known as discount points or buydowns, is a way to reduce your mortgage interest rate by paying an upfront fee. One point typically costs 1% of the loan amount and can lower your interest rate by around 0.25%. Lenders might offer the option to buy points when you purchase a home or refinance your mortgage. 

Here's a more detailed explanation:

• What are points?
  Points are a one-time fee you pay to the lender in exchange for a lower interest rate. 
• How much do they cost?
  One point generally costs 1% of the total loan amount. 
• How do they work?
  Each point you buy will reduce your interest rate by a certain amount, typically 0.25%. 
• When can you buy them?
  You can usually buy points when you take out a new mortgage or refinance an existing one. 
• Are they worth it?
  Buying points can save you money on interest over the life of the loan if you plan to keep your mortgage for a long time. 
• Considerations:
  You'll need to factor in the cost of the points and the potential savings on interest to determine if they are the right choice for you. 

Example:

Let's say you have a $200,000 mortgage. Buying one point would cost you $2,000 (1% of $200,000). This could potentially lower your interest rate by 0.25%. 

Factors to consider:

• Lender variations:
  The amount a point reduces your interest rate can vary by lender, loan type, and prevailing rates. 
• Time horizon:
  If you plan to refinance or sell your home before you've saved enough on interest, buying points might not be the best decision. 

Alternatives:

You might consider using the money for a larger down payment, which could also lower your interest rate or make your payments more manageable.