3 Things To Know About Mortgage Points

Are you in the process of getting a mortgage, but you're not sure if you should purchase mortgage points because you don't know much about them? Here are a few key things to know before you make a decision.

Mortgage Points Reduce Your Interest Rate

While the concept of mortgage points may seem a bit confusing, the best way to break it down is to think of it as paying to reduce your interest rate. It gets complicated for homebuyers because the terms used to explain it are not always straightforward. 

Each mortgage point will cost 1% of the mortgage value. Keep in mind that this is not based on the value of the home, but on what you are borrowing after the down payment. In addition, each mortgage point is going to lower your interest rate by .25%. This allows you to do some simple math to figure out how much mortgage points will cost you.

For example, a $250,000 home with a 20% down payment will have a $200,000 mortgage. Since each interest point is 1% of the mortgage amount, this means that It will cost $2,000 to reduce the interest rate by .25% You'd need to purchase 4 points to reduce the interest rate by a whole 1%. 

Mortgage Points Purchasing Can Be Limited 

While there is no hard limit to how many points you can buy, there is a point where you will not be allowed to buy them. Your lender may have a limit based on how much they are comfortable with since they want to make money on the loan. There may also be a limit based on local laws about how much you can pay in closing costs.

Mortgage Points Have A Break-Even Point

The nice thing about mortgage points is that it is fairly easy to figure out what the break-even point is on them. This is because each point will have a value that is known upfront before you buy them, and it is very simple to calculate how much you will save in interstate by purchasing the points. This allows you to look at the amortization schedule and determine exactly how long you need to stay in the home to break even on the point purchase. 

If you know that you will be selling the home before that break-even point, then purchasing mortgage points may not be worth it to you. If you are going to be in the home for quite some time after the break-even point, then you know it is a good buy. 

For additional information, contact a mortgage company in your area such as Pacific Mortgage Group.