The fees that you pay directly to your lender at closing to get a reduced interest rate is commonly known as mortgage point or discount price. As these points decrease your monthly payments of mortgage therefore they are also termed as “buying down the rate”.
Is it a good idea to buy points on a mortgage? All you need to do is gain complete understanding of points on a mortgage loan which this article will help you in achieving.
Most experts suggest that before you decide to understand all the necessary details about closing your mortgage, it is important to gain enough information about it to make an informed decision.
So, let’s dive in.
Table of Contents
How Many Mortgage Points Can I Buy?
If you buy just a single mortgage point then it will cost you around 1 percent of your total mortgage. For example, If you have a mortgage amount equal to $10,000 then buying 1 mortgage point will cost you $100.
Fundamentally, you have to pay some advance interest amount to lower your interest rate over a longer period of your loan.
What Is 3 Points On A Mortgage?
If you buy one point on a mortgage, it means you will get a discount of 0.25 percent from your mortgage rate.
Similarly, 3 points on mortgage mean that if you take a loan of $200,000 then your cost per point will be 6,000 which is higher than the cost you pay for lower points on mortgage. But, it will give you a lower annual percentage rate, higher monthly savings and lower monthly payments on your installment.
How Much Is 25 points On A Mortgage?
Generally speaking, if you plan to buy a home at some later point in life then the more points you have, the higher savings you can get on your interest over a longer period of your loan.
If you are a homeowner or want to own a home, then you can buy as many points as your financial condition allows. For example, if a homeowner buys a $200,000 mortgage, a single point would cost him $2,000. However, the rate of your mortgage would go down by 3.75 percent.
It is upto you to buy 3 points or 25 points. The more the points the higher you will be able to save for the long-term future. Most lenders will give you multiple options to buy a variety of points, all with their own unique higher savings and lower interest rate benefits.
However, most homeowners do not choose to buy as many as 25 points at one time as there are options available as well to secure a long-term future like refinancing.
Is It A Good Idea to Buy Points on A Mortgage?
Most people have one basic question about the points of a mortgage loan like, Is it a good idea to buy points on a mortgage? If you want to know the answer to this question, then you have to understand the period it takes to recover the cost of buying these points.
Now, how can you determine the recouping period? By calculating the break-even period!
Mortgage Points Break-Even Calculator
The break even-period requires very simple and basic calculations which you can do by yourself. Here are the two basic things that you need to know to determine the cost recovery period:
- Cost of buying points on a mortgage loan
- The savings on your monthly payments
Now all you need to do is divide the cost of buying points with the savings on your monthly payments to get the final result. This final number is the time that your savings from monthly payments take to recover the cost of your mortgage points.
For example, if your mortgage points cost you $3000 while your savings from monthly payment are equal to $60, then dividing $3000 by $60 gives you the time to recover your mortgage costs. In this case the recovery period is equal to $50.
Are Points Worth It On A Mortgage?
Are you confused if you should buy points on your mortgage loans or not? Before you start thinking about the pros and cons associated with these, you first need to ensure that you are left with some extra cash at the time of closing so you can easily pay for them in advance.
If you want to know if getting points is beneficial for you or not, you should calculate your cash. It is important to check that the cash you have is enough to up front. Next, you should consider different factors like reserves, down payments, closing costs, and above all the expected period within which you plan to own a home.
Suppose, you have plans to buy a home after reaching the break-even and you choose a mortgage with fixed-rate. Now, it is a sensible decision to buy points to decrease your interest rate.
There are very few situations in which if you decide to purchase mortgage points, it can help you in increased saving on your loans. However, if you want to choose this option, then you need to know all the terms and conditions involved. Specially, about the way these points work and the time on average that it takes to make additional costs beneficial for you.
Limitation on loan amounts and maximum income are applicable. Similarly, you cannot purchase all types of properties because of different eligibility criteria. The maximum loan to value (LTV) limit is set at 97% while the combine limit of loan to value is 105%
In cases where the loan to value is greater than 95%, a Community Second Program needs to approve the secondary financing. In other scenarios, there is a requirement of homebuyer education.
Now that you know about mortgage points, it is important that you make a buying decision after thoroughly analyzing all associated factors. As you have gained information about the total number of points so you do not need to worry anymore about how much is 25 points on mortgage.
Always remember that the cost of mortgage points is not a kind of fee that you can easily finance. It is always better to think of other ways to invest your money if you have some cash on hand. Why so?
Because, if it is possible for you to earn a higher return on your money than what you will get from loan saving then you should opt for it. However, mortgage points can increase your total savings over a longer duration of your loan.