Routing # 256078446
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How Do Mortgage Points Work?
What you'll learn: What you need to know about mortgage points and how they can save you money.
EXPECTED READ TIME: 3 MINUTES
August 27, 2024
If you are in the market to buy a home, you have probably been keeping a close eye on interest rates. You may have even begun making efforts to improve your credit score and DTI ratio to help increase your chances of being approved for a lower rate. But did you know that you can also buy down your rate with mortgage points?
Mortgage points can be a great tool for homebuyers who are looking to save money on interest, but it is important to be aware of their costs. Today, we will detail exactly what mortgage points are, how they work, and the pros and cons of investing in them.
What are mortgage points?
Mortgage points, also referred to as discount points, are often used by homebuyers to offset the costs of a mortgage. They are essentially interest fees that you can pay your lender at closing in exchange for a lower interest rate and monthly payments over the life of the loan.
How do mortgage points work?
One mortgage point is equal to 1% of your total loan amount and typically lowers the mortgage’s interest rate by about 0.25%. Here is a quick example: Say you are securing a $300,000 loan with a rate of 6.5%, one mortgage point would equate to $3,000 and typically lower your rate to 6.25%. However, it is important to note that the amount each point lowers a rate will vary depending on the lender and the type of mortgage you are getting.
Your mortgage points will be listed on your loan estimate, and you will pay for them at closing along with any other fees and costs.
What do mortgage points cost?
Every mortgage point will cost the equivalent of 1% of your total loan amount. Using the same example from above, that means on a $300,000 mortgage, a point will cost you $3,000 at closing.
Remember, when it comes to saving money with mortgage points, you are saving money in the long run. The key is living in the home long enough to recoup those initial costs. However, if you want to sell the home after a few years or plan on refinancing in the near future, then you may not end up breaking even on the points you purchase now.
Mortgage points break-even calculator
The most important financial benefit of buying mortgage points is the "break-even" point. This is when the initial cost of the points is paid off. Here is how you can calculate your potential break-even point.
Total cost of mortgage points ÷
amount saved each month with new interest rate =
number of months to reach break-even point
Using an example of a $300,000 mortgage with a 30-year term, if you wanted to lower your interest rate from 6.5% to 6%, you would spend approximately $6,000 at closing for the mortgage points. As a result, your monthly mortgage payment would be lowered from $1,897 (at a 6.5% interest rate) to $1,799 (at a 6% interest rate) which would save you $98 each month.
$6,000 ÷ $98 = 62 months to break-even
Based on this example, in order to recoup the cost of buying down your initial rate, you should plan to live in the home you are buying for at least 5.2 years (62 months).
Does buying mortgage points save money?
Mortgage points can be a great tool for homebuyers, but how much will they really save you over the life of your loan? At closing, it will cost you more, but the reduced interest rate will end up saving you money in the long run. However, that is only the case if you plan on living in your new home long enough to reach the break-even point.
Are mortgage points worth it?
As a homebuyer, it is important to be on the lookout for ways to save. While they may cost you more at closing, using mortgage points to buy down your interest rate can be a great strategy for long-term savings over the life of your loan. However, if you only plan to live in your new home for a few years or think you may opt to refinance in the near future, it might not be the best option for you. In these instances, you may want to consider a larger down payment instead.
It is best to consult with a trusted lender who can give you all the details on the strategies that may save you money.
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Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
Routing #256078446
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