So, the decision has been made to buy or refinance a home. All of a sudden, the term “mortgage points” keeps popping up in lender conversations. Lenders provide an interest rate and they keep saying things like zero points or that costs a point. What does that mean? In sports, I want as many points as I can get. Is it the same in mortgages? Actually, mortgage points is not important through most of your life. Of course, unless you are a mortgage lender! But, during the mortgage process it is important to understand this closing cost terminology.
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What are Mortgage Points?
Ok, about everyone understands the basics of getting a mortgage means paying back the money with interest. For the most part, the interest rate makes sense. But, the costs that determine an interest rate is a key area as well. Those are points, also called discount points. Points are a percentage of the loan amount.
Basically the lower the interest rate, at some rate points will be charged. A popular term is called “buying down the rate” or like mentioned above, paying discount points. A certain rate may not cost you any points, which is good. Then a lower rate will cost you some amount of mortgage points. The lower the rate goes, the more points are charged.
Should I Pay Mortgage Points?
Now we have the basic principles down. So, the question is should I pay mortgage points? The answer depends on each client’s scenario, goals, breakeven, and the interest rate options at that moment. Where things get confusing to borrowers is comparing one rate to another. No matter whether they are with different lenders or just multiple options with one lender. The factors to consider in paying points include…
- How long will I have this mortgage
- How much does each point lower my payment and rate
- Does it help me qualify
- Could the seller pay this cost
All of this means, that the lowest rate is not always the best option. For instance, living in a house for 3 more years and paying 2 discount points usually does not make sense. Let’s use paying 2 points or $4,000, in our example above. Also, let’s say this lowers the rate enough where the payment drops by $65 per month. It cost $4,000 to save $65 a month and over 36 months, the borrower recoups $2,340 (36 x $65) of it back. By the numbers, this would not make sense. But, remember sometimes it may be needed to qualify or maybe a seller or builder will pay this for you.
Mortgage Points Breakeven
Just like the example in the preceding paragraph, it is important to determine the breakeven point. When will the extra cost become paid up. Other words, if the rate/payment costs X, when will I make up for X in monthly savings? Once the initial cost has been recouped over time, the borrower is to the good every month after that breakeven.
Discussing Mortgage Points and Rates With An Experienced Loan Officer
While this topic and choice is not an every day concern, it is a key point of discussion in choosing a mortgage loan. Especially important in this age of online mortgages and call center type companies, it is so important to have a thorough discussion with an experienced loan officer. Don’t just go by an advertisement, online quote, or someone just quoting a payment. Choose an experienced loan officer who will take the time to discuss your goals, scenario, and each mortgage option works for you as well as choosing to pay points or not. Reach out to start the conversation with an experienced mortgage loan officer, by completing the following or giving us a call.