Demystifying Mortgage Points: Should You Pay or Pass?
Discover the facts about mortgage points and make an informed decision on whether or not you should pay points. Learn more about the cost and benefit analysis of paying mortgage points and make the best decision for your financial situation.
Demystifying Mortgage Points: Should You Pay or Pass?
Making the decision to purchase a home may be one of the biggest investments you'll ever make. An important part of the journey to owning a home is to understand your mortgage loan options and what they mean for you. One of the key terms you'll likely come across is “mortgage points.” But what are mortgage points, and should you pay or pass on them? Keep reading for all the information you need to make an informed decision.
What Are Mortgage Points?
Mortgage points, otherwise known as discount points, are a type of prepaid interest that are paid up-front at the time of closing. The more points you purchase, the larger the discount on your interest rate. 1 point is typically equal to 1% of the loan amount. Each point will usually lower your interest rate by a certain percentage (ranges from 0.25% to 0.50%).
Should You Pay for Mortgage Points?
Whether you should pay for mortgage points depends on your personal situation and goals. Generally, the more points you pay, the lower your interest rate during the life of the loan. This means you'll save money in the long run and also may have a lower monthly mortgage payment. However, if you don't plan to live in the home for very long, say 3-7 years, you may not save money if you paid for points. This is because you may have to sell or refinance to break even or make a slight profit.
In some cases, you may be able to negotiate with your lender for a lower interest rate and a lower amount of mortgage points. So it's always worth considering multiple lenders or asking your current lender if they can offer a better deal.
The Bottom Line
Mortgage points are an important concept to understand when you're purchasing a home. Paying for mortgage points can potentially save you money in the long run. But the decision to pay or pass should depend on your individual financial goals, the amount you plan to spend, and how long you plan to stay in the home. Consider all your options and speak to multiple lenders to get the best deal.