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Many homeowners are looking at mortgage rates today (some 15-year refi rates are close to 2% and some 30-year rates are below 3%) and thinking, wow, they’re low. But there are ways to make them even lower: Points, also known as discount points, are basically a form of prepaid interest. You buy them in exchange for a lower interest rate for the remainder of the loan term. One point of discount costs 1% of your total loan, so one point on a $ 200,000 loan costs $ 2,000; you will get about 0.25% reduction in your interest rate per point you buy. The savings can run into the tens of thousands of dollars when you do this, but buying points on your refi isn’t always worth it.
When does buying points make sense when refinancing?
Those who can afford a larger upfront payment and plan to stay home for a while may benefit from purchasing points, experts say. But note that it could take five or six years before this deal breaks even, says Greg McBride, chief financial analyst at Bankrate.
Considering how often homeowners refinance or sell, paying points up front but not breaking even for several years may not be very appealing. “Homeowners who don’t have a plump emergency savings account to cover the points or who face a loan-to-value threshold that could push them to a less attractive rate should stay away,” explains McBride. (Lenders typically want a loan-to-value ratio of 80% or less; you can divide the amount borrowed by the appraised value of the property to determine your LTV.) “But if you’re refinancing into a 15-year loan on a home in where you plan to stay in order to pay it off before retirement, paying points to further reduce the rate could be a good use of the excess money, ”says McBride.
The best way to tell if buying mortgage points is worth it is to sit down and calculate how much money you would save each month for each point you buy, says Jacob Channel, senior economist at LendingTree. “Once you’ve done that, divide the cost of the points you bought by the amount you’ll save each month, and you’ll see how many months it will take you to break even on your initial point investment,” Channel explains. If you plan to leave home before you break even, then purchasing the rebate points won’t be worth it because you will end up spending more than you save.
If that sounds like a boring amount of math right now, says Kate Wood, editor of home and mortgages at NerdWallet, you can assume that each point costs 1% of your mortgage balance for a 0.25% reduction. of the interest rate. With that in mind, she notes, “purchasing points will generally increase your closing costs by thousands of dollars and lower your monthly mortgage payment by tens of dollars.” But over time, it can add up and be worth it.
An option to study? “In some cases, you may even be able to use the equity in your home to pay off mortgage points, which will ultimately lower your rate and monthly payment,” says Jonathan Lee, senior mortgage sales manager for Zillow Home Loans.
Make sure to shop for points
Points are something to watch out for when shopping, even in this low rate climate, experts say. And lenders will sometimes include points in the refinance rate examples they post on their websites to make their mortgage rates appear even lower. “You often have to find a footnote or a disclosure statement to see the assumptions they use to generate these sample rates,” says Wood.