When it comes to mortgages, there is no shortage of terms to understand and options to consider. One of the most important—and sometimes confusing—terms is mortgage points. While they might lower your interest rate, mortgage points are not always the ideal fit for everyone. Understanding how they work and when they might make sense for you may help ensure you’re making an informed decision.
What Are Mortgage Points?
Mortgage points, or discount points, are upfront payments made to the lender at closing. Each point equals 1% of the loan amount. For example, on a $200,000 loan, one point would cost $2,000. In exchange, these points might lower the interest rate, which may result in reduced monthly mortgage payments over time.
How Mortgage Points Work
Essentially, you’re paying some of the interest upfront to reduce the interest rate over the life of the loan. The more points you purchase, the lower your interest rate may become. However, this upfront cost might not always be worth it, depending on how long you plan to stay in the home and how much is manageable at closing.
When Do Mortgage Points Make Sense?
Buying mortgage points might make sense if you plan to stay in the home for a long period. The upfront cost will be offset by the savings from a lower interest rate, which could add up over time. If you’re able to pay the points at closing without straining your finances, and you’re in it for the long haul, mortgage points may be a smart move.
However, if you’re planning to sell or refinance the home in a few years, the upfront cost of the points may not be justified by the savings from the lower rate. In this case, choosing a mortgage with no points and lower closing costs may be a more suitable option.
Weighing the Costs and Benefits
Before choosing mortgage points, it’s important to weigh the upfront cost against potential long-term savings. While mortgage points aren’t the ideal fit for everyone, they may help some homebuyers lower monthly payments and save over time. Think about your budget, how long you plan to stay in the home, and the overall impact on your mortgage. Speaking with a knowledgeable loan officer provides insight into whether this option aligns with your goals. Reach out to my team at Supreme Lending to continue this conversation!