It’s no secret that mortgage rates have increased over the last year. In fact, if you look back to early 2022, they’ve almost doubled, according to Freddie Mac.
Fortunately, those are just average mortgage rates, and the actual rate you’ll get if you buy or refinance a home will depend on a host of factors — things like your credit score, down payment size, loan type, and total loan amount.
Whether or not you buy discount points can impact your rate, too — and quite a bit.
What are discount points on a mortgage, though, and should you consider buying them? Here’s what you need to know.
What are mortgage points?
There are two types of points when it comes to a mortgage: Discount points and origination points. Origination points are simply a fee paid to your lender. It’s their compensation for processing, originating, and underwriting your loan, and typically, they’re not optional (though it may be somewhat negotiable).
Discount points, on the other hand, aren’t a necessity. Instead, they offer you the chance to buy a lower interest rate than the one you originally qualified for during preapproval.
“The reduced interest rate means a smaller monthly payment and less overall interest paid over the life of the loan,” says John Aguirre, owner of John Aguirre Home Loans.
How mortgage points work
Mortgage points typically cost 1% of the total loan amount per point. In return for that fee, you can lower your rate by up to 0.25%. (The exact amount depends on your lender.)
For example, if you were taking out a $400,000 loan, one point would cost you $4,000. If you were originally quoted a 6.5% rate, it could drop you to as low as 6.25%. You may also be able to purchase additional points to reduce your rate further.
You can also opt to buy fractions of points — such as half a point, a quarter of a point, etc. — in order to get a rate and monthly payment that better fits your budget.
Let’s take a look at how buying points could impact the payments on that $400,000 loan.
As you can see above, buying points can save you quite a bit on your long-term interest costs. In the above scenario, three points would shave about $70,000 in interest off the life of your loan.
“By paying points upfront, you can potentially save money over the life of the loan, especially if you plan to stay in the home for a long time,” Aguirre says.
When should you pay for discount points?
While a lower interest rate is tempting to most buyers, buying points isn’t always the right move for your money. In fact, if you don’t stay in your home long enough, it could even cost you more in the long run.
emergency fund or leave you little for a down payment, you may want to steer clear.
As Slyusarchuk explains, “If the borrower has limited funds for closing costs, buying points may not be the best use of their resources.”
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at [email protected].
Source: sfgate.com