When you get a home loan, you can pay extra money upfront to get a lower monthly bill. Every point you buy costs 1% of your loan and makes your rate go down. Think of it like buying a discount on your loan.
You need more cash when you first buy your home to do this. But over time, you can save a lot of money with smaller monthly bills. You just need to stay in your home long enough for the savings to be worth it.
To know if points are right for you, count how many months it will take to save back what you paid. If you plan to live in your home longer than that, and have the extra money now, buying points may help you save.
What Are Mortgage Points
When you get a home loan, you can pay special fees called mortgage points. Think of points like buying a lower interest rate for your loan. One point equals 1% of your loan amount. If you borrow $300,000, one point costs $3,000.
There are two kinds of points. The first kind helps you get a lower rate on your loan. The second kind pays for the work your lender does to set up your loan.
When you pay for points to get a lower rate, you can save money over time. This is like paying more now to pay less each month later.
The good news is you can also get a tax break on the points that lower your rate.
The Cost Versus Benefit Analysis
Thinking about buying mortgage points? Let's make it simple.
First, find out how long you need to stay in your home to make it worth your money. Take what you pay for points and divide it by how much you save each month.
Let's say you pay $4,000 for points and save $100 each month. You'd need to live in your home for 40 months to get your money back. After those 40 months, you start to save real money.
If you plan to move or get a new loan before those 40 months are up, don't buy points. It won't help you save money.
Also look at loan rates right now. If rates are going down, you might want to get a new loan soon. In this case, it's better to keep your money than buy points.
Calculating Your Break-Even Point
Let's talk about how to know if buying mortgage points is worth your money. Think of it like a savings game – you pay money now to save money later.
To find out when you start winning, take how much you paid for points and split it by how much you save each month.
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Here's a simple case: You pay $3,000 for points and save $50 each month. After 60 months (that's 5 years), you get back what you paid.
Look at how long you want to live in your home. If you plan to stay longer than it takes to get your money back, points might help you save.
But if you move or change your loan too soon, you might lose money. Try using a simple online tool to see what works best for you.
When Points Make Financial Sense
Buying points is like paying extra money now to save money later. Let's keep it simple.
First, look at how much money you have saved up. Think about how long you want to live in your new home. Look at what home loans cost right now.
Points work best when you plan to stay in your home for many years. You need enough money saved up to pay for them. When loan costs are high, points can help you save a lot of money over time. They also help make your monthly bill smaller.
But points may not help if you plan to move soon. They also may not be smart if you need your savings for other things.
Negotiating Points With Lenders
When you want to get a home loan, you need to talk to more than one bank. Banks charge different fees and rates. These fees are called points. You need to look at all the costs to find the best deal.
Start by:
- Getting price quotes from three banks on the same day
- Looking at the full cost of each loan
- Using quotes from other banks to ask for a better deal
Banks will often lower their fees if you show them a better offer from another bank.
Make sure the bank puts any deal you make in writing. Check that these deals show up in your final papers before you sign.
Tips:
- Get quotes on the same day since loan costs change daily
- Look at the APR number – it shows the real cost of your loan
- Ask banks to match or beat other offers
Always read your papers well and keep copies of everything the bank gives you.
