Should you Buy Points to reduce your mortgage rate?

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Should I Buy Points


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What are points? Points are a way to reduce the cost of your mortgage by securing a lower interest rate. Points, essentially, are a fee that you pay the bank in order to buy a lower interest rate. The bank, essentially, makes a portion of its money up front by selling you points rather than making more money over the life of the mortgage with higher interest rates.

A point is 1% of the value of the mortgage you want. So, if you want to buy a home for $100,000, a point would cost you $1,000, and two points would cost you $2,000. Buying points gets you the “points rate” for your mortgage, which is a discounted interest rate based on the fact that you paid points. Paying points can save you up to a full percentage point on your mortgage (e.g. get you a 6% interest rate rather than 6.5% or 7%).

The difficult part of buying points is that it requires more cash up front. When you are buying a home - especially for the first time - you have to deal with closing costs, home inspection and a down payment. Cash tends to be tight. Ask your mortgage lender to illustrate the differences involved in paying points. It could lead to a lower monthly rate and overall a less expensive home over the life of the mortgage.