Mortgage Points

What the heck are mortgage points anyway? Should you buy points? What does it mean if you buy points? Buying points is a process whereby you can reduce your mortgage interest rate, which in turn reduces your monthly payment. But each "point" will cost you 1% of your mortgage balance. So, if you have a $100,000 mortgage, a mortgage point will cost you $1,000 and it will reduce the interest charged on your mortgage by .25 of a percentage point. This would mean that a 5% mortgage would become a 4.75% mortgage.

Fundamentally, when you pay points, you are actually paying interest in a lump sum upfront to get a lower rate on your fixed rate mortgage. The more points you pay, the lower your mortgage rate.

The points system is a unique feature of the US lending environment. Most other countries do not use points, and mortgages are a bit less complex as a result. Having to consider the impact of points is another factor in deciding on the mortgage that is right for you.

With that in mind, what makes more sense for you? More points and a lower rate? Or fewer points and higher rate? To decide, you need to consider whether you can afford to make the upfront payment now and whether you will hold the mortgage long enough to benefit from an upfront interest rate reduction. The longer you plan to have your mortgage, the more it makes sense to pay for points now because you'll have a long time to benefit from the lower rate.

Generally, points are available on locked-in mortgages. If you really want to make this strategy work for you, you should be looking at a long-term locked in mortgage, which you won't have to renegotiate for at least 5 to 7 years.

If you are going to be cash short when you buy your home, points may not be an option. In this case, shop around for the mortgage that gives you the best interest rate without points. And keep in mind that there are a large variety of lenders in the mortgage business, and that many are willing to compete to get your business. You may be able to get the same or similar rate without points that you would have buying points at another lender.

There are lenders who offer "negative points". These can be described as cash rebates to you, for bringing your business to the lender. However, it also generally results in a higher interest rate being applied to your mortgage loan. In most cases, negative points will cost you a lot more over the long term, although you will have additional cash in hand in the short term.


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