Mortgage points, also called interest points, are a way to buy down your mortgage’s interest rate. They’re paid upfront and may be able to save you money on your mortgage loan. This guide explains what they are, how they work and more.
Mortgage Points, Explained
Many people choose to buy mortgage points because they offer a way to save money. Mortgage points are paid upfront, as a percentage of the total loan amount. One point typically costs 1 percent of the loan amount.
How Do You Buy Mortgage Points?
When you’re getting a mortgage, you’ll have the opportunity to buy points. The number of points you can buy depends on the lender and the loan product. Some lenders may let you buy as many as four points, while others may only allow you to buy one point.
You can pay for points yourself or roll the cost into your mortgage loan. Keep in mind that if you finance the cost of points, you’ll be paying interest on them over the life of your loan.
Related: 5 great pieces of advice for home-sellers
How Much Do Mortgage Points Cost, and How Much Will They Lower Your Interest Rate?
The cost of mortgage points varies depending on the interest rate and how many points you’re buying. In general, each point costs 1 percent of the loan amount. That means on an $800,000 loan you’d pay $16,000 to buy two points.
Mortgage points can help you in two ways:
- They lower your interest rate. The more points you buy, the lower your interest rate will be.
- They may help you get a lower mortgage rate when you refinance.
You can use points to buy down the interest rate on both fixed-rate and adjustable-rate mortgages.
How Many Points Should You Buy?
There’s no simple answer to how many points you should buy. It depends on several factors, including the current interest rate, how much money you have to put down, how long you plan to stay in your home and more.
A good rule of thumb is to decide how much lower you want your interest rate to be. For every percentage point that you’re willing to pay in upfront costs, you can usually lower your interest rate by 0.25%. If you’re willing to pay 2% in upfront costs, you could potentially lower your interest rate by 0.5%.
Of course, this is just a general guideline. You’ll need to do your own research and talk to a mortgage lender to see if buying points makes sense for you.
Related: 3 things a lot of sellers want from buyers (but won’t ask for)
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