When you are purchasing a home, you encounter a lot of new terminology and concepts that can seem complicated. One of the items that brings up a lot of questions is mortgage points: what are they, and should you pay them to buy down your interest rate? The good news when you work with Homelend USA is, we have been doing this for years are here to guide you through the process, helping you to understand everything as you go. Here, we’ll give you the basic information on mortgage points to get you started thinking about how paying them may or may not be right for you.
What are mortgage points?
A point is a fee you can pay the lender in order to reduce the interest rate on your loan. One point equals 1 percent of your mortgage loan. So if you are borrowing $200,000, one point equals $2,000. You can pay that amount at closing in order to reduce the cost of your interest rate by a certain amount—usually .25 percent. If your interest rate is 5.25 percent, and you pay one point, or $2000, your interest rate is reduced to 5 percent.
“In the most basic sense, paying points is just like paying interest up front,” says Mark Bigelow, President of Homelend USA. “When you are considering paying points, you have to figure out when and if you will get back what you pay up front.”
Questions to ask when considering paying points:
Do I have the upfront cash available? You pay points upfront at closing as part of your closing costs. So the first question to ask is whether you can afford the amount in addition to other closing costs you may be paying. If you have the cash available, then you can consider the following questions to see whether paying points makes sense.
How long will I stay in this home? It only makes sense to pay points if you will eventually break even and start saving money long-term over the life of the loan. Consider your current life situation, the home you are buying, and imagine how long you believe this house is the right home for you. “As a benchmark, the average person stays in a house for seven years,” says Bigelow.
Am I likely to refinance? When you look at the current interest rates, consider whether you anticipate that they will fall in the coming years to a level where you will want to refinance. A refinance before your break even point will mean that you do not have a chance to recover the cost of the points you paid. Also consider the type of mortgage—if you are getting an ARM, where interest rates can change after a number of years, a refinance, should rates go down, becomes more likely. In this case, it is less likely you will benefit from paying points.
When will I break even? This is the ultimate question when considering whether to pay points. To determine whether you will save money, take the cost of the points, and divide it by the amount you will save each month. This will show you how many months it will take to break even. “If break even is 4-6 years in the house to get back what you pay up front, and you stay in the house for more than that amount, you’re saving money if you pay points,” says Bigelow. “So if you are going to keep the loan for 15 years and you can afford to, it makes sense to pay down points.”
With so many factors to consider, it makes sense to hire an expert to help walk you through the process of understanding points and how you may benefit. Interested in working with Homelend USA on your mortgage? Contact us today!