What Are Mortgage Points and Why Do They Matter?

You may have heard the term “buy down points” when discussing a mortgage loan. This refers to an important option homebuyers can use to lower their mortgage interest rate and save thousands of dollars over the life of the mortgage.

Read on to learn more.

What Are Mortgage Points?

When a borrower decides to get a home loan, they’ll pay an annual percentage rate (APR) on the money. Mortgage points are optional fees that borrowers can pay to decrease the APR on their loan.

Points can be purchased in increments of .25 (.25, .5, .75, 1, 1.25, etc.), depending on how low a borrower wants to get the interest rate. The amount that buying mortgage points reduces the interest rate also depends on the type of loan the borrower is using.

Are Mortgage Points Worth Buying?

Even if you think buying mortgage points is a no-brainer, borrowers do need to factor the overall cost into the equation to make sure it’s worth it.

Keeping in mind that every point costs roughly 1% of the mortgage amount after any down payment has been applied, the actual down payment amount can also vary for each borrower. For example, down payment requirements may be less than 20% on certain types of loans, like FHA or USDA loans.

So, while the more points you purchase will decrease your overall loan amount in the long run, the total due at closing will increase. For that reason, taking your down payment and other closing costs into consideration are all part of the equation.

Having an affordable home loan payment should be top of mind for all borrowers but the process for determining whether to purchase points, and how many, will be different for each borrower.

When Should Homebuyers Use Mortgage Points?

As suggested above, borrowers who struggle to come up with the down payment and closing costs probably don’t need to think about buying mortgage points, simply because they can’t afford them.

However, buying points is a smart move for borrowers who not only have the funds for buying mortgage points but who are also planning to stay in the house for a long time.

Understanding what mortgage points are and why they matter can help borrowers decrease their mortgage payments and save quite a bit of money in the long run. Homebuyers should talk to their loan officer to see if buying mortgage points is the best choice for them.