Over the past year, all eyes have been on interest rates. For people who are interested in buying or selling a home, changes in interest rates can buying power.  Recently we have seen small decreases in rates, but sometimes these decreases don’t match up with buyers plans, and this is when buying down mortgage points can come into play. Whether you are a first time home buyer or a seasoned veteran, buying down mortgage points can be beneficial.  Here’s why.

But first…what are mortgage points?

When you are approved for a mortgage, you are given an interest rate for that mortgage.  A mortgage point, or discount point, is a one time fee buyers can pay to lower their interest rates. 

How much do mortgage points cost?

Each point costs one percent of the mortgage amount.  Many lenders offer buyers the ability to buy less than a point at different increments. It is always best to speak with your lender to find out the specifics that their company offers. 

What does buying down mortgage points do?

Buying mortgage points helps to lower your interest rate.  Each point that a buyer purchases reduces the interest rate by a set amount (typically, but not always 0.25%) that is determined by the mortgage company.  This means that the rate the interest rate is reduced varies by lender.  Lenders can also cap the number of points you can buy.

When do I pay for mortgage points?

The fee for buying down points is paid as part of your closing costs. Sometimes buyers can use a portion of their closing cost assistance to buy down mortgage points.

What are the benefits of buying down mortgage points?

New homeowners can save a lot of money by buying points.  A mortgage of $320,000 at a seven percent interest rate for a thirty year fixed mortgage would cost $1,703 a month for principal and interest.  If the interest rate was reduced to 6.5% through buying points, the monthly payment would be $1,618.  If the buyer stayed in the home throughout the thirty year mortgage, the buyer would save $30,700 in interest. It is crazy to see how the different of a hundred dollars can add up to a large cost savings in the long term.

Should I buy down points?

Talking out different scenarios with your lender is the best way to see all of your options and to decide what is best for you.  Buying down your interest rate works best for people who:

  • are planning on living in the home long term- This way you maximize the savings.
  • don’t plan on refinancing- When you refinance you are trading one mortgage for another, so buying down points isn’t very cost effective if you are planning to refinance to a lower interest rate anyways.
  • have put twenty percent down on the mortgage

The other thing to consider about buying down mortgage points is that you need to have the cash upfront to do so.  This is important to consider within your budget. If you are purchasing a home that needs some TLC, then you will want to consider where putting your money is best.