If you’re in the market for a new home loan (or a refinance), you might have come across the term “mortgage points.” This term is confusing for most buyers and homeowners because “points” doesn’t seem like the right word to describe what mortgage points actually do.
So, in this article, we’re clearing up the confusion! We’ll explain:
What mortgage points are,
How mortgage points work, and
How to tell if mortgage points are worth it.
Here’s what you need to know about mortgage points.
WHAT ARE MORTGAGE POINTS?
Mortgage points (sometimes called discount points) are simply deductions in the interest rate on your home loan. Instead of paying the interest rate your lender offers, you can buy mortgage points from your lender to reduce that rate.
The goal of mortgage points is to save money in the long term by paying a fee upfront to lower your interest rate for the term of the loan. The lower your interest rate, the less you spend on interest each month. And this reduced your total interest expense over the term of the loan.
HOW DO MORTGAGE POINTS WORK?
When you buy a mortgage point, you pay an upfront fee (typically 1% of the loan amount) to reduce your interest rate by a set amount (typically a quarter of a percent).
So, for example, if you are borrowing $800,000 to buy a $1,000,000 home, a mortgage point would cost $8,000 (1% of $800,000). And if your interest rate would have been 6%, your new, reduced rate would likely be 5.75% (a quarter of a percent less than the original 6% rate).
ARE MORTGAGE POINTS WORTH IT?
Mortgage points can be worth it if you keep the mortgage long enough to recoup your initial investment. If you sell the house or refinance your home loan before saving enough in interest to cover the upfront fee you paid, you would lose money by purchasing points.
For example, if you bought two mortgage points on an $800,000 loan to reduce the rate from 6% to 5.5%, it would cost you $16,000 upfront. But it could save you around $254 per month.
If you divide your $16,000 upfront expense by the $254 per month savings, you find that it would take you around 63 months of mortgage savings to recover your initial mortgage point investment. So you would need to own the home without refinancing for five years and three months to start seeing benefits from your mortgage points.
Sticking with the same figures from this example, if you keep your home for a full 30-year mortgage term without refinancing, you could potentially save $91,440 in total interest expense by purchasing those two mortgage points!
MAKE THE MOST OF YOUR HOME PURCHASE WITH EXPERT GUIDANCE FROM SEQUOIA REAL ESTATE
The experienced real estate agents at Sequoia Real Estate are proud to offer knowledgeable guidance on your next purchase while making the homebuying process as smooth and enjoyable as possible!
While we don’t offer direct mortgage advice (we can connect you to a full-time mortgage expert for that), we keep current on real estate financing topics so that we can answer your questions about how the home loan process works.
Whether you’re ready to start looking for your new home today, or you simply want to discuss your options with a well-qualified expert, contact Sequoia Real Estate today for a friendly, free consultation!