What Are Mortgage Points?
Historically low interest rates might help unlock the doors to your dream home sooner than expected. Low rates can increase your buying power in a competitive housing market. You might also be able to afford more home, with money left over to fund other financial goals. But accessing the best rates often requires excellent credit scores (740 and above).
Don’t worry if your credit is less than perfect. You can still secure a low-interest rate loan by purchasing mortgage points. Doing so can help shrink your expected monthly payment and reduce the amount you need to bring to closing.
What are mortgage points?
There are two types of mortgage points: 1) origination and 2) discount. One point is usually equal to 1% of the loan amount.
Origination points are paid to the mortgage lender for processing the loan. Some lenders do not charge origination points/fees. If your lender assigns origination points to your mortgage before closing, it’s possible to negotiate a lesser amount or pay them separately.
Discount points reduce your interest rate. Borrowers who buy mortgage discount points are prepaying loan interest. The number of points you can purchase will vary by loan type and geographic location. Depending on the current market rate, homebuyers might buy between .50 to 3 points.
It’s possible to reduce historically low interest rates even further when you buy mortgage points.
When does it make sense to buy discount points?
If a lower monthly payment is your goal, then prepaying interest by purchasing discount points can help make that happen. However, you must weigh the upfront cost with how long it will take to break even. Start with the loan amount, interest rate, and monthly payment figures. Use a loan calculator to figure how different interest rates affect the monthly payment for a specific loan amount.
Then factor in the cost of the points and how many you must purchase to lock in that rate.
Next, divide the cost of the discount points by the monthly savings. For example, if you purchase one discount point that costs $2,000, with an expected savings of $20 a month, it will take you 100 months (4.2 years) to reach your break-even point.
$2,000/$20 = 100 months (4.2 years)
In this scenario, you would not benefit from the lower interest rate until 4.2 years have passed.
Buying mortgage points isn’t for everyone. Ask yourself these questions before deciding whether they make financial sense based on your specific situation.
- How long you plan on staying in the home?
- Will you be able to pay for the points at closing along with the down payment and other closing costs?
- Is it possible to achieve the same or better savings by making a larger down payment?
- Will the monthly savings be enough to make a difference in your budget?
What should I do if I want to learn more?
Ephrata National Bank recommends the Homebuyer Education Program for first-time and experienced buyers. This free program guides you through key homeownership topics so you’ll feel more confident throughout the home buying process. It covers a variety of topics, including:
- Home affordability
- Down payment assistance
- Managing a mortgage with student loan debt
- Credit basics
- And more!
If you’re ready to take the next steps on the path to homeownership, contact an ENB Mortgage Expert for assistance in selecting a home loan that matches your budget and financial goals.