These days, it’s pretty common to pay mortgage points to buy your down interest rate.
Why? Because mortgage rates are no longer cheap, so home buyers are often stretching to get into a property.
Or they want a slightly lower interest rate to make homeownership feel a little less taxing.
Whatever the reason, you should know what you’re actually getting when you pay mortgage points.
Not only in the way of monthly savings (and full loan term savings), but also when you’ll break even on the upfront cost.
Mortgage Points Calculator
Find out how long it takes to break even when buying down your mortgage rate and whether it’s worth it depending on how long you plan to stay in the property.
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Find Out How Long It Takes to Recoup Upfront Costs
When you pay mortgage points, also known as discount points, you’re essentially prepaying a portion of interest at closing.
In the process, you to secure a below-market interest rate on your home loan. That results in lower monthly payments and less interest paid during the life of the loan.
However, the tradeoff is that there is a cost. And most importantly, that cost is non-refundable.
Unlike a temporary rate buydown, in which you get a refund for the unused savings, there is zero refund for discount points paid at closing.
As such, you’ll need to break even (and hopefully a lot more!) on the cost for it to be worth it.
For example, if you pay one mortgage point to buy down your date by say 0.375%, you’ll need to save enough via lower payments and reduced interest to make it worth your while.
This break-even period will be a certain month when you’ve saved enough to offset the upfront cost via reduced monthly payments and a lower outstanding balance.
Because remember, a lower-rate mortgage also means more of the payment goes toward principal each month instead of interest.
My mortgage points calculator determines this for you based on a few basic inputs. You can also factor in tax deductions if applicable as points can be deductible as well (consult your CPA or tax advisor).
It will help you decide if it makes sense to pay mortgage points or skip it and settle for a market rate.
By the way, you might be able to snag a lower rate simply by taking the time to shop and compare lenders, without paying any points!
Mortgage rates can vary a ton between different mortgage companies, banks, credit unions, and mortgage brokers.
And if you only get one quote you’ll never know what else is out there.
Frequently Asked Questions
How much is a mortgage point?
It’s simply 1% of the loan amount. So if the loan amount is $250,000, one point is $2,500.
To determine the cost, simply multiply your loan amount by the number or fraction of points. Or just use my mortgage points calculator that does it automatically!
What is the break-even point when paying mortgage points?
It’s the month and year when the upfront cost of the points has been recouped via a combination of lower payments and a reduced outstanding loan balance.
You pay points at closing and slowly get “paid back” each month via lower payments and reduced interest expense.
You’ll want to keep the loan and stay in the property long enough so the upfront cost is actually worth it.
Simply put, the longer you keep the loan, the more you save. And vice versa.
What if I sell or refinance earlier than expected?
There’s a chance you might “leave money on the table” in these situations because the upfront cost hasn’t yet been recouped.
This is why it’s important to know when that date is to determine if paying now for possible savings later makes sense.
Especially if you only plan to keep your loan (or home) for a short period of time.
Those planning to stay for a long time (or with a cheap loan they plan to keep) will generally benefit the most.
Are mortgage points refundable?
No. Unlike a temporary buydown, in which excess funds are typically returned to the borrower in the case of prepayment, discount points are not refundable.
So if you refinance the mortgage or sell before the break-even period, that money is a sunk cost. You can’t get it back.
How much does it cost to buy down my mortgage rate?
It will vary based on your loan parameters, current market rates, the lender in question, and how much of a discount you’d like.
A rule of thumb sometimes used is that one point might buy down your rate a .25% to .375%. So it could take two points to get a half-point reduction.
On a $400,000 loan amount that would be $8,000 upfront! So it’s not cheap.
But again, this amount and ratio can vary widely based on a number of factors.
As mentioned, shop around and compare lenders to determine if you can get a lower rate without a buydown. Or an even lower rate with a buydown.
Those who don’t bother to compare lenders could wind up paying to buy down a rate they could have obtained elsewhere for no cost!
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