Are Mortgage Points Worth the Investment?
Mortgage lenders offer a variety of programs for home buyers. These programs are in place to allow you to find a mortgage that works for you and your current situation. Depending on your lender, there may be mortgage points or discount points available to purchase that help lower your monthly mortgage payment by lowering your interest rate.
What are mortgage points?
Mortgage points or discount points are lump sums of money paid upfront to a mortgage lender in an effort to reduce the interest rate on the mortgage. One mortgage point is 1% of the loan, or in other words $1,000 on every $100,000 of the loan amount. Typically mortgage lenders allow you to purchase up to 3 or 4 points on your mortgage. Each point you purchase lowers your interest rate by around 0.25%. The money put toward these points are tax deductible.
When does purchasing mortgage points make sense?
Purchasing mortgage points doesn’t make sense for every home buyer. You need to weigh what you’re paying up front with your total monthly savings on your mortgage payments to see if it makes sense for you. Typically, purchasing mortgage points makes sense for homebuyers that plan to stay in the home they’re purchasing long term. For example, let’s say you pay 3 mortgage points up front on a $200,000, 30-year loan (or $6000) with an interest rate of 6%. This lowers your rate by .75%, meaning you now pay an interest rate of 5.25%. With the original loan amount your monthly payment was about $1,200 and these mortgage points lower your monthly payment to about $1,105, or by $95 a month. This would take you about 63 monthly payments, or a little over 5 years to break even in savings. If you plan on being in the home for greater than the time it takes you to break even, than it’s a great option for you, however if you don’t, it could cause you to lose money in the short term.
Alternatives to mortgage points
Instead of purchasing mortgage points there are other ways to invest that money. For some home buyers the closing costs and downpayment fees when buying a house already max out their budget. For other homebuyers, the monthly savings do not outweigh the opportunity to invest that money in other places. It may be more important to you to purchase new furniture for the home or save the money for home renovations that could increase your home’s value. It also may be advantageous to invest the money you plan to put down for mortgage points into stocks to make a quicker or larger return on your investment.
If you are a homebuyer that plans to stay in their home for an extended period of time, and can afford to put money toward mortgage points, they may be a great option for you. However, it’s important to crunch the numbers prior to putting money toward mortgage points to weigh whether or not they’re a smart investment for your unique situation. The best way to navigate your different options are to consult with a realtor.
