When you buy a house, you can save money on your monthly payments by paying extra money at the start. These extra payments are called points. One point costs 1% of your total loan. Each point you buy will lower your rate a bit.
To see if points will save you money, do some simple math. Take the cost of the points and divide it by how much you save each month. This tells you when you start saving real money. Points work best if you plan to live in your home for a long time and have extra money saved up.
You can also ask different banks about points. This helps you get the best deal. The key is to think about how long you want to stay in your home. If you stay long enough, points can save you lots of money over time.
What Are Mortgage Points
Points on your mortgage are a way to save money on your monthly payments. Think of points like buying a better deal on your home loan. When you buy one point, you pay 1% of your loan amount to get a lower interest rate. This lower rate means you pay less each month.
Let's say you want to buy a $300,000 home. One point would cost you $3,000. This would cut your interest rate by about 0.25%.
There are two kinds of points:
- Discount points: You pay these to get a lower rate on your loan
- Loan points: You pay these to cover the bank's costs
Before you buy points, figure out how long it will take for the monthly savings to be more than what you paid. This helps you know if points are worth it for you.
Types of Mortgage Points
When you get a home loan, you can pay special fees called points. There are two kinds of points that help with your loan costs.
The first kind is discount points. These help you get a lower rate on your loan. You pay more money now to save money later. For every point you buy, you pay 1% of your loan amount. This makes your monthly bill smaller.
The second kind is called origination points. These points help pay for the work your lender does to get your loan ready. They usually cost about 0.5% to 1% of your loan amount.
Your lender uses this money to do the paperwork and other tasks. You can talk to your lender about these costs to try to get a better deal.
Calculating Your Break-Even Point
Want to know if buying mortgage points is worth it? Let's find out when you start saving money.
First, find out how much points cost you upfront. Then see how much they save you each month. Divide the cost by the monthly savings. This tells you how many months until you break even.
Let's say points cost you $3,000. They save you $50 each month. You'd break even in 60 months, or 5 years.
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Think about how long you want to stay in your home. If you plan to move or get a new loan before you break even, points aren't a good choice. But if you stay in your home longer than that, you'll save money.
Just keep in mind that your plans might change. Interest rates could go up. Your life could change too. These things can affect when you break even.
When Points Make Sense
You can make smart choices about buying mortgage points if you think about how long you'll stay in your home. Points help you most when you plan to live in your home for a long time. They also work well when loan rates are high right now.
If you have extra money when you buy your home, points can help lower what you pay each month. This works best if you take out a big loan. You might also save on taxes if you buy points, since you can count them when you do your taxes that year.
Don't buy points if you think you'll move soon or get a new loan in a few years. Also skip points if you need to keep your money for other things like home fixes or saving for hard times.
Negotiating Points With Lenders
Want to get a better deal on your home loan? Talk to different lenders! Ask three or more banks what they can offer you. Each one might give you a different mix of costs and rates.
Tell lenders what other banks offered you. They often want your business and may give you a better deal. Ask them to show you all the costs in simple terms.
Look at the yearly rate, which shows the full cost of your loan.
Don't be shy – you can ask to change any part of the deal. This includes how much you pay up front to get a lower rate on your loan.
