Buying Down Your Interest Rate: The Mortgage Points Strategy

  Buying Down Your Interest Rate: The Mortgage Points Strategy

Overview

When it comes to purchasing a home, one of the biggest decisions you’ll make is choosing a mortgage. And while the interest rate may seem like a fixed number, there are actually ways to lower it – one of which is through the mortgage points strategy.

INDEX

Overview

Lower Interest Rate

Mortgage Points

Conclusion

So what exactly are mortgage points? In simple terms, mortgage points are fees paid to the lender at closing in exchange for a lower interest rate on your mortgage. Each point typically costs 1% of the total loan amount and can lower your interest rate by about 0.25%.

But why would someone want to pay extra fees just to lower their interest rate? Well, let’s break it down.

Lower Interest Rate

Firstly, the lower the interest rate, the less you’ll pay in interest over the life of the loan. This means you’ll have smaller monthly mortgage payments and ultimately save money in the long run. For example, if you have a $200,000 mortgage with a 4% interest rate for 30 years, you’ll end up paying a total of $343,739. However, if you purchase two mortgage points, lowering your interest rate to 3.5%, you’ll pay a total of $320,366 – a savings of over $23,000.

Additionally, mortgage points can also be tax deductible, which can provide some extra savings come tax season. To be eligible for this deduction, the home must be your primary residence and you must itemize your deductions on your tax return.

So now that we understand the benefits of buying down your interest rate, let’s talk about the mortgage points strategy.

The first thing to consider is how long you plan on staying in the home. In order to see significant savings from purchasing mortgage points, you’ll need to stay in the home for at least 5-7 years. This is because the upfront cost of the points needs to be spread out over the course of the loan in order to see the savings in interest.

Another important factor is your current financial situation. Purchasing mortgage points requires more money upfront, so it’s important to make sure you have enough cash on hand to cover the cost. If you’re already stretching your budget to afford the down payment and closing costs, then buying points may not be the best option for you.

However, if you have extra cash available and plan on staying in the home for a significant amount of time, the mortgage points strategy can be a smart financial move.

Mortgage Points

It’s also important to note that there are two types of mortgage points – discount points and origination points. Discount points are the points we have been discussing – the ones you purchase to lower your interest rate. Origination points, on the other hand, are fees paid to the lender for their services in setting up your mortgage. These points are not tax deductible and do not lower your interest rate. When talking to your lender, make sure you clarify which type of points you are purchasing.

Now, you may be thinking, why not just negotiate a lower interest rate with my lender without purchasing points? While this may be possible, it’s important to remember that the mortgage points strategy is a guaranteed way to lower your interest rate. Plus, negotiating a lower interest rate may result in higher closing costs or fees elsewhere in your loan.

In the end, the mortgage points strategy is not for everyone. It’s important to carefully consider your financial situation and how long you plan on staying in the home before deciding if it’s the right move for you. It’s also crucial to do the math and determine if the cost of the points will be worth the savings in interest over the life of the loan.

It’s always a good idea to consult with a financial advisor or your lender to fully understand the impact of purchasing mortgage points and to determine if it aligns with your long-term financial goals.

Conclusion

In conclusion, the mortgage points strategy can be a valuable tool for lowering your interest rate and ultimately saving money on your mortgage.However, it’s important to carefully consider your options and make an informed decision based on your personal financial situation. With the right approach and proper planning, the mortgage points strategy can be a beneficial choice for homeowners.