The best way to describe mortgage points, also commonly called discount points, is to think of it in terms of prepaid interest. When you purchase mortgage points, you are essentially paying your way to a reduced interest rate, such that for every single point you are buying, you might lower your interest rate by 0.25%.
But while this might seem enticing, to decide if you should purchase points or not, you first need to consider some crucial factors that would have a significant impact on your decision.
Consider Your Options
If you’re relatively financially stable, before buying mortgage points with your spare funds, think about this: where would you spend your money if you did not purchase mortgage points? For example, if you don’t already have health insurance, you could use the funds for buying one instead.
You could likewise pay off credit card debt to boost your credit rating or even put down a higher down payment so you won’t have to pay for PMI or private mortgage insurance.
Evaluate Your Budget
Before even thinking about buying mortgage points, check to see if you could comfortably afford to buy them. Mortgage points are not free, and every point would cost you 1% of the value of your loan.
This means that if your home loan were $250,000, a point would cost you $2,500 and two points would cost your $5,000, and so on, plus closing costs, explains an experienced loan officer here in Nashville.
Put simply; don’t risk your financial stability just to get a reduced interest rate through buying mortgage points.
Think of Your Long Term Goals
The funds you used for buying points would reduce your monthly payments, sure. However, it would take some time for your potential savings to equal the money you spent.
Your breakeven point would be dependent on the amount you paid and your potential monthly savings, plus how much you would’ve made on the money you spent if you invested it instead. If you know that you’ll move before reaching your breakeven point, don’t buy mortgage points.
On the other hand, if you consider your home forever or dream home, and are financially stable, then consider buying mortgage points.
Take into account your long-term goals and weigh your decision to purchase mortgage points against viable ways you could spend your extra money on. Buying a house is a huge financial decision, so you need to tread carefully and crunch the numbers.