When you shop for a mortgage, a lender may ask if you want to buy discount points. Doing so can lower your interest rate, but you need to figure out how much you would save and how long you’re likely to live in the house to decide if it’s worth it.
How Do Mortgage Discount Points Work?
Discount points are optional fees that you can pay at closing, in addition to other closing costs. One point is 1 percent of the amount borrowed. A point will lower your interest rate by an amount set by the lender. You can buy one or more points, or partial points.
If you decide to purchase discount points, you will have a lower interest rate and lower monthly payments for as long as you have the mortgage. The amount of the reduction will depend on the amount you borrow, the lender’s terms and the number of points you buy.
Should You Pay Extra for Points?
To decide if it makes sense to buy points, you need to know how much you would save each month. Your lender can provide that information. You also need to figure out when you would break even. To do that, divide the amount that you would have to pay for points by the amount you would save each month to calculate the number of months it would take to recoup the upfront fee.
If you continue to live in the house after that point, you will save money overall. If, however, you decide to sell the house before you break even, you will lose money.
Knowing when you would break even is especially important if you’re considering an adjustable-rate mortgage. If the interest rate rises and you refinance before you break even on points, you will lose money.
What’s the Right Decision for You?
Lenders offer different interest rates and a point from one lender may lower your interest rate by a different amount than a point from another lender. To figure out if buying points is a good idea, compare mortgage quotes from several lenders, both with and without points, to find out how much you would pay each month under various circumstances.
Consider how much you would have to pay upfront to buy points and calculate the breakeven point. If you plan to stay in the house longer than that, it may be a good idea to buy points. If you will likely move or refinance before then, you would be better off not paying extra for points.
Don’t forget other closing costs. If you would struggle to afford all the fees and wouldn’t have enough money left over to buy furniture and appliances and to cover maintenance and repairs, it would be better not to buy points so you don’t use up all your savings.
You may be able to save money another way. Making a larger down payment could reduce your loan amount and might help you qualify for a lower interest rate.