Mortgage Points and How They Can Cut Your Interest

Buying a house is the most expensive purchase most of us will ever make, so naturally, anything that can reduce the cost of a mortgage is worth looking into. Savy homebuyers buy mortgage points, also called discount points to lower the amount of interest they pay.

What are points on a mortgage?

Mortgage points are the fees a borrower pays a mortgage lender to trim the interest rate on the loan. This is also known as buying down the rate. Each point the borrower buys costs 1 percent of the mortgage amount. So one point on a 400,000 loan would cost 4,000. Each point typically lowers the rate by 0.25%, so one point would lower a mortgage rate from 6 percent to 5.75 percent. How much each point lowers the rate varies among lenders, however, the rate-reducing power of a point also depends on the type of mortgage loan and the overall interest rate environment.

Buyers can buy more than one point and even fractions of a point. A half-point on a 400,000 loan, for example, would cost 2,000 and lower the mortgage rate by 0.125 percent.

The points are paid at the closing table and listed on the loan estimate document, which buyers receive after they apply for a loan, and the closing disclosure, which borrowers receive around 3 days before the closing of the loan.

Buying down the rate is typically used when the buyer plans to stay in the home long term.

Apart from your Lender providing you with this calculation to see if its worth it, I also like using Bankrates mortgage points calculator and amortization calculator to figure out whether buying mortgage points will save you money.

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