If you’re planning to finance your home purchase, you might be wondering whether you should pay mortgage points. Your lender will likely offer several options for home loans, and you’ll be approved for a rate based on market conditions and your personal credit profile.
Mortgage points offer the ability to decrease your monthly payment because you’re prepaying some of the interest upfront. There are some instances where paying a mortgage point makes sense, and others when it does not.
How Do Mortgage Points Work?
As part of the closing process on your home loan, you’ll be offered the choice to reduce your interest rate by paying points. This is often called “buying down” the rate.
Each mortgage point is 1% of the loan amount. For example, if your home loan is $450,000 at 4.00% APR, you would pay $4,500 upfront and your lender would then reduce your interest rate by 0.25% to 3.75%.
This rate reduction varies by lender and loan type, so it’s important to shop around and take your time comparing the starting rate, APR, and reduction offered by paying points. Lenders will typically show a simple breakdown on their websites, so that is a good place to start. Then you’ll want to discuss your options with a loan expert to help you determine your best course of action.
Are Mortgage Points Worth It?
By and large, the cost to buy down your rate – especially if you live in Southern California where home prices are high – takes a long time. So a good rule of thumb for determining whether to pay mortgage points is how long you intend to keep your mortgage.
To help you decide if paying mortgage points is worth it, you need to calculate how long it will take until you break even. If we use the example above and you pay $4,500 upfront, you’ll take your principal and interest payment from $2,148 (at the 4.00% rate) down to $2,084 (at the 3.75% rate). That’s a difference of $64 a month. Next, divide the cost of the point ($4,500) by the monthly savings ($64) and you’ll get a break-even time of more than 70 months. In other words, you need to keep your mortgage and not refinance again for at least six years to make paying the point worth the upfront cost.
Compare Your Options
Buying a home is one of the most important purchases you’ll ever make. As such, it is vitally important to do as much research as possible to find the right loan for your needs. With so many options available, turn to your credit union for expert guidance throughout the process. Contact us at mortgage@orangecountyscu.org or (800) 506-5070 to speak to a mortgage loan consultant today.