Does It Make Sense to Buy Mortgage Discount Points?
Buying a house involves working with your loan expert to find the right mortgage program for your situation, and getting a mortgage interest rate that keeps your mortgage payment within a comfortable range.
Your mortgage rate is a determining factor in how much you’ll pay monthly, and it also has an impact on your total housing expense over the life of the loan. So if you’re looking to get the best deal, consider the possibility of buying mortgage points.
There are two types of points with a mortgage loan. One type is called an origination point, which you don’t buy. This is a lender fee paid at closing and includes the cost of processing the loan. Origination points are generally 1% of your loan balance.
The other type is a discount point intended to buy down your mortgage rate. Discount points are paid at closing, and each point costs about 1% of the loan balance and generally reduces your mortgage interest rate by 0.25%.
Discount points are optional fees, so you might wonder whether this is the right choice for you. Here are a couple of questions to ask yourself when deciding whether it makes sense to buy down your mortgage rate.
1. How much cash do you have available?
Buying a house includes a down payment, a home inspection and closing costs. Therefore, the decision to buy down your mortgage interest rate depends largely on your available cash.
Ideally, you shouldn’t spend all of your savings on a home purchase. Rather, you should maintain a cash reserve for emergencies and moving expenses. So if you’re presented with the option to buy down your interest rate, figure out how much extra you’ll need to bring to closing, and then decide whether discount points make sense from a financial standpoint.
Although buying down the rate can reduce your monthly payment, the immediate savings might not be significant. You'll have to run the numbers with your loan officer to determine whether the extra cost is worth the estimated savings.
If you’re buying a $200,000 house with a 30-year fixed-rate mortgage at 5% interest, you’ll have a monthly payment of about $1,074 (excluding taxes, homeowners insurance, mortgage insurance and HOA). This particular mortgage also has a total mortgage cost of about $386,512. On the other hand, if you pay an extra $2,000 at closing to purchase one discount point and reduce your interest rate to 4.75%, your mortgage payment decreases about $30 and you’ll save $10,000 over the life of the loan.
2. How long will you keep the mortgage?
When determining whether to buy discount points, you must also consider how long you plan to keep your current mortgage. Some people purchase a home with the intent of moving two to five years later, whereas others purchase their forever home.
Since discount points increase your closing costs, you’ll need to keep the mortgage long enough to breakeven. In other words, you wouldn’t want to refinance or sell the property until a certain amount of time passes. Using the above illustration, if you buy one discount point and spend an extra $2,000 in closing costs to save $30 a month, you would have to keep the mortgage for at least 67 months (or 5 1/2 years) to recoup the cost of the points.
If you’re considering discount points to lower your rate, the experts at Cherry Creek Mortgage are happy to answer any questions you have about buying down your rate. We can provide closing costs estimates and advise you on the best course of action. Give us a call to speak with one of our loan experts today.