Mortgage Points (buying down the rate)

What Are Mortgage Points?

When you’re shopping for a mortgage, you may come across the term “mortgage points.” Mortgage points are a way to lower your interest rate by paying a one-time fee upfront. Each point costs 1% of your mortgage amount, so if you buy one point on a $200,000 mortgage, you’ll pay $2,000.

In return for paying this fee, your lender will lower your interest rate by a certain amount. The amount of the interest rate reduction varies depending on the lender and the current market conditions, but it’s typically 0.25% per point. So, if you buy one point on a $200,000 mortgage, your interest rate will be lowered by 0.25%, from 5% to 4.75%.

Should You Buy Mortgage Points?

Whether or not you should buy mortgage points depends on a number of factors, including your financial situation, your plans for the home, and the current interest rates.

If you plan to stay in the home for a long period of time, buying mortgage points can be a good investment. The longer you stay in the home, the more time you’ll have to recoup the cost of the points through the lower interest payments.

However, if you plan to move in a few years, buying mortgage points may not be worth it. You won’t have enough time to recoup the cost of the points before you sell the home.

Ultimately, the decision of whether or not to buy mortgage points is a personal one. You should weigh the pros and cons carefully before making a decision.

Here are some things to consider when deciding whether or not to buy mortgage points:

• The current interest rates. The lower the interest rates, the less likely it is that buying points will be a good investment.
• Your plans for the home. If you plan to stay in the home for a long time, buying points may be a good way to lower your monthly payments.
• Your financial situation. If you don’t have a lot of cash saved up, you may not be able to afford to buy mortgage points.

How to Calculate the Break-Even Point

The break-even point is the amount of time it takes to recoup the cost of buying mortgage points through the lower interest payments. To calculate the break-even point, you can use the following formula:

Break-even point = (Cost of points) / (Monthly savings)

For example, if the cost of points is $2,000 and the monthly savings are $50, the break-even point is 40 months.

Conclusion

Mortgage points can be a good way to lower your interest rate and monthly payments, but they’re not right for everyone. Before you decide whether or not to buy mortgage points, weigh the pros and cons carefully and consider your financial situation and your plans for the home.