You’re probably aware that your interest rate is one of the top factors that contribute to your monthly mortgage costs. The lower your rate, the more money you have for other life necessities. You also probably know by now that mortgage points or discount points are directly tied to how much your interest rate would be.
Essentially, you could reduce your interest rate when you purchase points. But is it a good idea for you to buy points?
When You Should Buy Mortgage Points
In general, if you’re planning on living for a long time in the house you’re buying, it’s a good idea to purchase points because the longer you live in the house, the higher the chance that you’d make savings off of your lower interest rate, explains PRMI Josh Mottashed, an experienced mortgage broker in El Dorado County.
However, since you need to pay for the points upfront, you have to factor them into your budget. This might likewise add to your other mortgage costs such as the down payment and closing costs.
But also keep in mind that you could deduct points on your taxes, which means that purchasing points is sort of like pre-paying the interest on your home loan. You also need to consider the opportunity cost—which is how much you could potentially make on the money if you leave it in the bank or invest it somewhere else—of the money you were going to spend to buy the points.
When You Shouldn’t Buy Mortgage Points
If you’re only looking to live in your house for some time, like less than five years, purchasing points so that you could reduce your interest rate might not be beneficial for you. You could instead opt for a variable-rate home loan with a lower interest rate that would be much more affordable for you than a fixed-rate home loan even after purchasing points.
The Final Word
The decision to purchase points could be quite confusing since, after all, they’re worth 1% of your mortgage, and between different lenders, points won’t reduce your interest rate by the same amount. Bearing this in mind, consult an experienced mortgage broker for options specific to your circumstances and advice on buying points.