According to Freddie Mac, mortgage interest rates are still hovering at all-time lows, signaling that the COVID-impacted economy is still struggling. With interest rates well under three percent, it’s an ideal time to buy or refinance a home. Can you get an even better rate by paying points?
When you’re quoted a rate like 2.73%, it may only be available if you pay points, such as .07%. Points are also known as discount points, a fee that’s paid directly to the lender at closing to reduce the interest rate on your loan. Explains BankofAmerica.com, one point costs 1% of your mortgage amount, or $1,000 for every $100,000. Essentially, you’re prepaying some of the interest to get a lower rate.
The longer you plan to stay in your home, the more likely it is that you’ll “break even” or recoup the cost of buying points. Divide the cost of the points by how much you save on your monthly payment. Let’s say you buy two points for $4,000. The monthly savings to you is $58.54, so it will take you 68 months, or 5.67 years, to break even. If you’re planning to stay in your home a shorter time than that, buying points isn’t a good deal, and it may not be a good deal even if you plan to stay years longer.
That $4,000 would be better spent toward your down payment, especially if you’re paying mortgage insurance. Your lender can help advise you which is best.