Have you reached a point in the mortgage process where the lender is asking if you want to purchase mortgage points? You may be wondering what these are, and if they are worth purchasing. Here is what you should know to understand this part of your mortgage.
What Are Mortgage Points?
Buying mortgage points are a fancy way to say that you can lower your interest rate by paying more money up front. Each point purchased will lower your mortgage interest rate by approximately .25%. This may not seem like a lot, but it can save you thousands of dollars over the course of your mortgage. Savings $20 or $30 on your mortgage each month can really add up over 30 years.
You do not have to buy full points either since you can buy portions of points as well to work within your budget of how much you want to spend. This makes mortgage appoints accessible to anyone that gets a mortgage.
What Determines The Cost Of Mortgage Points?
Your lender will take many things into consideration when determining how much a mortgage point will cost. They'll look at your overall credit score, with borrowers that have great credit getting a reduction in how much each point will cost. The size of your down payment can also contribute to the cost of points, as well as things like your debt-to-income ratio.
When Are Mortgage Points Worth It?
Mortgage points may not be a good deal based on your specific situation regarding your home. Mortgage points generally have a break-even timeline, where you must stay in the home for a specific amount of time before the cost of the point justifies the purchase. This means that you will be more likely to benefit from mortgage points if you are looking into buying a home for the long term, rather than a home that you will flip or don't plan to stay in for very long.
The break-even point can also be affected by making additional principal payments towards your mortgage once you start it. Since each additional payment will lower how much you pay in interest each month with you being closer to the end of the amortization schedule, that break-even point can be pushed further out. Your lender will work with you to determine how many points are worth buying and when you'll start seeing a return on your investment.
For more information about mortgages, contact a mortgage lender.
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