Everyone wants their mortgage rate to lock-in the lowest possible rate. Is there a way to acquire it? Indeed there is by purchasing mortgage points. You buy a mortgage point, which is normally worth 1% of your loan amount, and your mortgage lender lowers your rate gradually. Although mortgage points are also referred to as “discount points,” the concept is the same: you pay now to save money on interest later.
Buying points may seem like a good idea, especially if you plan to keep your house or investment property for a long time, but it has its negatives as well. Let’s take a look at the benefits and drawbacks of buying points on a mortgage right now.
Advantages of buying mortgage points? The most obvious benefit of buying mortgage points is that you obtain a lower interest rate, whether you have a good credit score or not. A lower rate can save you a lot of money over time and mean a reduced monthly payment if you have the loan for a long period.
Disadvantages of buying mortgage points?
1. Private mortgage insurance (PMI) may be required: If you put down less than 20% on a home (on a conventional loan, at least), you’ll have to pay PMI, which will increase your monthly payment for at least a few years. 2. You’ll end up with a larger debt balance: A larger mortgage loan entails a higher monthly payment as well as higher long-term interest. Calculate the costs of having a bigger balance versus the costs/savings of having points.
Mortgage points are a good investment if you expect to stay in your house for a long time and want to create equity. Calculate the break-even point — the moment at which you’ll save more than the cost of the points — before you buy them. Purchasing discount points is generally a good idea if you intend to still own the house at that time.