Understanding Mortgage Points

When you get ready to purchase a home, one of the biggest factors in your decision is likely the cost. A home is one of the largest purchases that most people will make in their lifetime so a lot of thought should go into its affordability. The majority of home buyers finance their home purchase through a loan called a mortgage. Financial institutions offer mortgages at an interest rate that is based on federally set limits as well as the credit history and overall risk of the buyer.

Mortgage Points

You may have heard the option to get a better interest rate by using mortgage points. A point is the amount of extra money that you pay upfront in order to get a lower interest rate for the life of the loan, often 30 years. One point is equal to one percent of the loan amount. Paying points up front often results in a lower payment overall. Sounds great, right?

Points are not the best choice for every scenario. If you plan to sell the home sometime before the 30-year mortgage period, paying points up front might be more than you would be able to save in interest. Adjustable Rate Mortgages, where the interest rate can change after a fixed initial period, may not allow the interest reduction to carry past that initial period.

Points also require that you pay more initially, which might impact your ability to pay a minimum down payment. Some mortgages with a low down payment option require the borrower to pay for Private Mortgage Insurance, which could be more expensive than the amount of interest you save by buying points.

Talk to your mortgage professional about the option to buy points if you think it may work for you. They can run various scenarios to help you make your decision.