Buying Mortgage Points: What are they and how do they work?
If you’ve considered becoming a homeowner, you might have heard the term, “buying down the interest rate.” That is where mortgage points come in. These points are the fees a borrower pays their lender to trim the interest rate and lower the overall amount of interest they pay over the loan’s term.
What are points on a mortgage?
Points on a mortgage act as prepaid interest and are due at closing. The amount you pay upfront in mortgage points effectively buys down the interest rate you will pay throughout your loan. One mortgage point typically costs 1 percent of your original loan’s principal. For example, one point on a $100,000 mortgage would cost $1,000.
How do they work?
Mortgage points are a type of prepaid interest. By buying points, you can reduce the interest rate on your loan, and ultimately, lower your monthly payment on your mortgage.
There are two kinds of mortgage points – origination points and discount points.
Origination points represent the fees that borrowers pay to lenders or loan officers for evaluating, processing and approving mortgage loans. These points are not tax-deductible and do not lower your interest rate.
Discount points are prepaid interest. The purchase of each point generally lowers the interest rate on your mortgage by up to 0.25%. Most lenders provide the opportunity to purchase anywhere from a fraction of a point to three discount points.
Should you invest in them?
Buying mortgage points may make sense if you want to stay in your home for a long time. If you keep the same mortgage for the long haul, mortgage points can reduce the overall cost of the loan and keep more money in your pocket as you pay a lower monthly mortgage. If you plan to stay for only a few years, it might be best to purchase fewer points or none at all.
United Housing is looking for ways to help people buy points.
Interest rates are higher now than they have been for more than a decade. That means that the cost to buy a home is expensive – and fewer people can afford to make a home purchase. Interest rates are set by forces beyond our control, so we’re looking for creative financial partners and other organizations to help us create point-buying programs that support people who will be priced out of the market without buying down their interest rates. If you want to learn more about our work or have ideas for a partnership, connect with us at info@uhinc.org.
While buying mortgage points makes sense for some, it isn’t financially beneficial for everyone. You’ll need to crunch the numbers to determine whether you can save with discount points.