Hold your horses! I sense you’re probably stuck in a mental whirlwind, frantically trying to navigate the financial maze of mortgage rates. Right? And boy, can they be a headache, especially these days with home prices hitting record highs and making everything all the more intimidating. But, hey, there might just be a teeny-weeny chance to cut your mind-numbing monthly mortgage payment. Excited? Keep reading!
Here’s the thing: when you’re on the hunt for a new property or considering a grand wave of your refinance wand, your lender gets to call the shots on your mortgage interest rate. And guess what? Their choice rests on the overly judgemental factors like your credit profile and income. However, if you play your cards smartly (and I mean “four-of-a-kind” smart), there’s a hidden route to a lower rate and long-term savings – Meet buying mortgage points.
What Are Mortgage Points?
So, what are these mysterious mortgage points? Picture this, you’re all set to get a mortgage and there pops up an opportunity to purchase mortgage points. Sounds fancy? But it’s just the financial jargon for “buying down your rate”. Simply put, every shiny mortgage point you buy (which costs just about 1% of your total loan amount) gently nudges your interest rate lower. Aren’t lower rates just music to our ears?
Lend your ears to Lucy Randall, the director of sales at Better.com, she gives a pretty clear insight on this. As she says, “Mortgage points, also called discount points, are like paying extra at closing to get a lower interest rate on your loan. So, sure, you’re paying more upfront, but over the life of the loan, you’re the one smiling with lower monthly payments.”
Now, don’t start thinking it’s some magic potion with a set price. The reduction in your interest rate depends on, well, a million things including your specific mortgage, the lender, and the whims of the market. But, if we get down to numbers, each point generally brings your rate down about 0.125% to 0.25%, according to our mortgage guru Lucy.
Here’s a scenario to paint a clearer picture: say, you’re looking at a 7% rate on a $400,000 loan but aiming for a sweet 6.5%. That’s where your friendly neighborhood mortgage points swing into action. If one point can drop your rate by 0.25%, two points hustling for you could lower your rate 0.5%. So, get ready to cough up $4,000 (1% of the loan per point) and voila! You’ve got a 6.5% rate, saving you about $133 monthly.
What if you’re not in the mood for full points? Fear not, partial points are an option too. Like, half a point would do half the magic and drop your rate to around 6.375% (a 0.125% chop).
One thing to note though, you might not be able to buy more than four points from a lender. Though chances are slim, like Lucy reminds us.
Are Mortgage Points Worth the Cost?
Mortgage points sure do have their charm. They play a magic trick and poof goes your interest rate, plus you’re paying less in the long run. But let’s face it, they’re not always the knight in shining armor. These tricky points could end up being a joker.
Omeed Salashoor, the sales manager and certified mortgage planning Jedi at Homebridge, with his two cents says, “The emotional draw of the lowest-rate-ever can be strong, but it’s not always in the best interests of homebuyers. Buying mortgage points is like a long marathon, it really pays off if you’re in for the long haul.”
Now he has a point. You need to think long-term with points, as they demand an upfront investment. And you’ll want to stick around that property long enough to get back those costs through the savings on your monthly payments. So if the home you’re buying is more of a ‘till death do us part’ type, mortgage points may work out fantastically. But if you’re looking at it as just a summer fling, maybe lose the points?
Gather round as I tell you about our earlier situation: Shelling out $4,000 for two points, you snatched that juicy 6.5% rate and saved $133 a month. The break-even point would be around 30 months or a long wait of two and a half years. If you’re not likely to keep the house that long, well, mortgage points might not seem such a smart choice anymore.
As Lucy puts it, “Paying for mortgage points shows a beautiful dream of saving thousands over your loan’s lifetime—but that dream could turn into a nightmare if you end up selling or refinancing too soon. Remember, the upfront cost can be as hefty as a thanksgiving turkey.”
One more thing to ponder over is whether buying these tempting mortgage points will drain your resources for the down payment. If you end up with a down payment of less than 20% after buying points, you might be staring at a private mortgage insurance (PMI) bill. This raises your monthly expense by about $30–$70 per $100,000 borrowed.
Why Do Mortgage Points Exist?
Hear me out, mortgage points aren’t just fluff; they serve as a carrot to entice borrowers to stick to their loans longer. And this game of mortgage-loyalty brings stability and added profits for lenders and investors.
Marina Walsh, the brains at Mortgage Bankers Association leading industry analysis explains, “Lenders and investors love stability. Mortgage points discourage borrowers from flit-flying between refinancing deals or paying off mortgages too early. This gives investors confidence that the loan won’t vanish overnight, ending their return on investment.”
It’s no secret love spell, even if you have paid for points there’s no guarantee you won’t want to refinance. But, let’s be honest, if you’ve invested your hard-earned money in points, wouldn’t you think twice before refinancing and losing the upfront cost on top of the new closing costs?
On the lenders’ and investors’ end, it’s an exciting deal promising lower rates. But as you zero in on buying points, remember it’s not just to make the investor happy. It should benefit your wallet too, in the long run.
What About Lender Credits?
Stepping into the mortgage arena, you’re not just armed with the option of buying points. Your lender might also dangle the carrot of a lender credit if you agree to a slightly higher rate but lower closing costs. It could come in handy if you are a bit short on upfront cash but can manage a larger monthly payment.
Now, these lender credits aren’t really your best friends if you plan on staying put in your home for the long haul. The interest rate is higher and you’ll end up paying more over time. But if you do bite the bullet and go with credits, refinancing for a lower rate in the future isn’t off the table.
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So there you have it! Now that you’re empowered with the knowledge of ninja tools like mortgage discount points and lender credits, you’re ready to navigate the financial maze with more confidence. Here’s hoping you find the best mortgage rates and save more over time!