Mortgage discount points are portions of a borrower’s mortgage interest that they elect to pay upfront. By paying points upfront, borrowers are able to lower their interest rate for the term of their loan.
Purchasing a house is the most expensive purchase most of us will ever make, so anything that can reduce the cost of a mortgage is worth looking at.
Is it a good idea to buy down points on a mortgage?
Generally, the more points you pay upfront, the lower your interest rate will be. How do points lower interest rates? Because they’re prepaid interest, points reduce the interest rate you’ll pay over the life of the loan. A rule-of-thumb is that paying one point will reduce your interest rate by one-quarter percent.
Paying discount points to get a lower interest rate can be a great strategy. Lowering your rate even just 25 basis points (0.25%) could save you tens of thousands over the life of the loan. But there’s a catch. You have to keep your mortgage long enough for the monthly savings to cancel out the cost of buying points.
Points can also get you a lower monthly payment. Since mortgage points help you lower your interest rate, you’ll have to pay less in interest each month. The less interest you pay, the smaller your monthly payment will be
Are discounts points worth it?
It may make sense to pay discount points when you’re buying a long-term investment property or a home you plan to hold for many years.
The primary drawback to buying down your mortgage rate is that it increases the upfront closing costs of buying a home. Buying points ties up your liquid cash.
You should plan to keep the home loan long enough that your total savings outweigh the upfront cost of buying points.
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