In some cases, it may benefit you to ‘buy down the interest rate’ by paying extra money up front in the form of discount points.
Should I Buy Down for a Lower Interest Rate?
Discount points or mortgage points refer to money you pay your lender during closing time to enjoy savings over the term of your loan. If you have the cash to spare and the numbers make sense, buying points to lower your interest rate can mean less money paid monthly and over the course of your mortgage.
Use this calculator to help determine if this makes sense for you.
Buying down the rate refers to the process of paying fees to your lender at closing to get a discount on the mortgage rate. The amount you need to pay and the amount you will get in return will depend on the market and on your lender.
Running the Numbers
While getting a lower monthly mortgage payment may be appealing, you need to determine whether it makes sense in the long run. Let’s say you have a $200,000 mortgage on a 30-year loan, and your lender offers you each point at $2,000 each. Two points lower your APR home loan by 0.5% Let’s say your original rate was 4.5%. If you buy two points at $4,000 up front, you will save $58.54 each month and over $20,000 over the course of your mortgage.
Since it can be difficult to pay thousands of dollars extra during closing, after you have paid closing costs, down payment and other expenses associated with buying a new home, it is important to determine whether it makes sense to buy down for a lower interest rate.
One way to do this is to calculate how long it will take you to pay off the amount you invest in mortgage points fees. This is known as the break-even point, and you can calculate it by diving the cost of the points by the monthly amount you stand to save. The result is the number of months it will take you to break even. You will want to ensure this number of months is below the number of months you have a fixed rate.
Are Mortgage Points Right for Me?
There are a few additional considerations if you are looking at discount points. One is that they can be a tax break for you. You will want to speak to your tax preparer to find out whether there are any benefits at tax time if you get mortgage points.
The second big decision is whether it makes sense to buy discount points or to put more money toward your down payment. A larger down payment can also bring down your interest rate and can help you avoid having to pay mortgage insurance — which you must pay if your down payment is less than 20%. You will want to compare discount points with a larger down payment to see what makes sense. If you opt for mortgage points, check different lenders to find one with the most advantageous terms.
Money Help Center has unbiased, free calculators to help you make the right choices when it’s time to get a home loan. Check out our calculators to save on your purchase.