One decision you have to make for yourself when settling on a home is whether to purchase mortgage points.
What are mortgage points?
Mortgage points, also known as discount points, are a way to lower one’s interest rate by ‘pre-paying’ a certain amount towards your interest total at closing. Mortgage points are slightly different from a down payment, which is money paid towards the loan principal. Purchasing mortgage points usually leads to a lower down payment, while avoiding mortgage points gives you extra money to put towards a larger down payment. Both options tend to mean lower costs in the end, so which one is right for you?
How are mortgage points beneficial?
Points are beneficial because they reduce your mortgage’s interest rate. One point is worth one percent of the loan’s value, and usually knocks about 1/4th of a percent off your interest rate. Paying one or two points will lead to lower costs over time, but is it worth it? It depends on your financial situation. If you can afford to put some extra money up-front at closing, then go for it. Points will pay off in the long run since your interest rate will be bumped down. Additionally, if you’re planning on staying at this home for a long time, you’ll have the time to break even on your investment in points.
Disadvantages of mortgage points
Points aren’t for everybody, however. If you don’t plan staying in the home for that long, points can hurt you, as they don’t build equity. A down payment would be your best bet in this case, so that you can increase your home’s equity. Also, having too low of a down payment because of points may require you to buy private mortgage insurance, making your investment in points an unhelpful decision. Additionally, your reduced interest rate may still be subject to fluctuations in the market.
You could also opt for neither, and pay the lowest possible down payment in order to minimize closing costs. Again, it all depends on your financial and living situation.
As always, it’s important to get a second opinion before making a decision. Be sure to understand what’s best for you before moving forward.