Should you pay points to lower your mortgage rate?

With mortgage rates near historic lows, more Americans are looking to secure a new home loan. One way to get a more favorable cost is to pay mortgage points to lock down a deal.

“Mortgage points are useful tools used to help clients meet their financial objectives,” said Tom Trott, branch manager at Embrace Home Loans, in Fredericksburg, Md.

If you're considering paying mortgage points to save money, just make sure you do your research first. After all, mortgage points may not be the best choice for every home buyer.

What are mortgage points?

Mortgage points give borrowers an opportunity to buy lower interest rates on their mortgage by paying an upfront fee.

To get the best deal on mortgage points, visit Credible and select mortgage deals from a wide variety of lenders in just a few minutes. 

“A point is 1% of the loan amount. Points are most often used to buy-down the interest rate which can help a client afford a more expensive home. If a client can afford the monthly payment but is short on the down payment, the client can agree to pay a higher rate and get a credit towards their closing costs," Trott explained.

As an example, Trott cites a $240,000, 30-year-fixed rate home mortgage loan, where one point would equal $2,400. Here’s how it would work:

• Customer A: “If someone paid one point ($2,400) for a rate of 2.875%, the monthly principal and interest payment would be $995.74,” he said.
• Customer B: “If someone had a 3.25% rate with no points, the monthly principal and interest payment would be $1,044.50.”
• Customer C: “If someone had a rate of 3.625% with one negative point a ($2,400 credit towards closing), the monthly principal and interest payment would be $1,094.52.”

In the above example, a home mortgage consumer chooses to pay the point and is saving $48.76 monthly. “The breakeven ($2,400/$48.76) on paying the point off is 49 months,” Trott said.

“Customer C is short on funds to close, so instead of taking a rate of 3.25%, he or she can choose to pay an additional $50.02 per month and reduce their closing costs by $2,400.”

If you're interested in paying for mortgage points or simply want to find out how you can save on a home loan as interest rates drop, visit Credible. Credible can help you compare mortgage companies and navigate the paperwork whenever you're ready.

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Is it worth it to pay points?

Opting for mortgage points depends on a buyer’s personal situation.

“There are several scenarios when mortgage points make sense,” Trott said. “If you pay a point to lower your interest rate, the monthly mortgage payment is obviously lower. By having a lower payment, the borrower can qualify for a more expensive home.”

In a refinance situation, if a mortgage consumer pays a point or fractional point they will save in monthly interest over the life of the loan.

“A simple breakeven analysis can be done by dividing the cost of the point by the monthly savings in the mortgage payment,” Trott said. “This will calculate the number of months to breakeven on paying the fee. So, if the breakeven was five years and the buyers only plan on being in the home for three years, then opting for mortgage points wouldn’t be cost-effective.”

If you’re considering purchasing a new home, or want to refinance your mortgage, use Credible to connect with experienced mortgage lenders to compare accounts, including rates, points' worth and costs.

You can use a mortgage calculator specifically for points to help you decide if purchasing points is the right decision for you.

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Variables with mortgage points

Mortgage points come in two varieties – discount points and rebate points. Borrowers need to understand each one.

• Discount points. “Discount points act as fees you can pay to the lender to lower your effective interest rate on the loan,” said Riley Adams, a senior financial analyst for Google in the San Francisco Bay area.
• Rebate points. “Rebate points act as closing costs on your mortgage getting added to the loan's interest rate,” Adams said. “Typically, people refer to discount points when discussing mortgage points.”

Whichever mortgage point model one chooses, making the right call is a decision based on the borrower’s unique financial needs. Visit Credible to learn more about how you can save today.

“Assuming someone is buying a home that they will own for several years (and not pay off the mortgage quickly), paying points can save tens of thousands of dollars,” said Todd Huettner, president of Huettner Capital in Denver. “Determining whether points are worth it or not depends on how much a buyer pays relative to the monthly savings and additional principal paid.”

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Mortgage Points Formula

To decide if paying points is a good idea, Huettner advises taking these steps:

• Determine the breakeven point in months or years.
• Determine how long the mortgage loan will last.

“If the buyer can pay for the points and will very likely be in the home at least as long as the breakeven point, and there is a good chance you will have the loan two-or-three times that long, then paying points probably makes sense,” Huettner stated. “That said, there may be a difference between how long you have the loan against how long you have the house. A buyer may buy a home and have it for 20 years but points would likely be a waste of money if that buyer planned to pay off the loan or refinance it in two years.”

If you need more guidance on mortgage points, reach out to a financial advisor or visit Credible. At Credible, mortgage consumers can also talk to an experienced mortgage loan officer and get straight answers to mortgage questions.

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