What are mortgage points?
Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. This is also called “buying down the rate,” which can lower your monthly mortgage payments.
One point costs 1 percent of your mortgage amount (or $1,000 for every $100,000). Essentially, you pay some interest up front in exchange for a lower interest rate over the life of your loan.
In general, the longer you plan to own the home, the more points help you save on interest over the life of the loan. When you consider whether points are right for you, it helps to run the numbers. Here’s an example:
*Sample APRs and points are for illustrative and educational purposes only and are not an actual rate quote, prequalification or commitment to lend. Actual rate buydown per point varies by loan program and market conditions.
**This is the cost of principal and interest only; taxes and insurance are not included in this example.
Will you break even?
It’s important to consider how long it takes to recoup the cost of buying points. This is called the break-even period. To figure it out, divide the cost of the points by how much you save on your monthly payment. The resulting number is how long it takes for the monthly payment savings to equal the cost of the points.
Calculating your break-even point
Monthly payment savings
Months to reach your break-even point
Key things to know about mortgage points
The terms around buying points can vary greatly from lender to lender. Here are some important things to consider:
- The interest rate reduction you receive for buying points is not set and depends on the lender and the marketplace.
- Buying points may give you a tax benefit. Contact a tax professional to see whether doing so might affect your tax situation.
- Points for adjustable-rate mortgages (ARMs) typically provide a discount on the loan’s interest rate only during the initial fixed-rate period. Run the numbers to ensure that your break-even point occurs well before the fixed-rate period expires. For Bank of America customers, however, if rates go up during the adjustable period, your rate will be lower based on the points you initially purchased.
- If you need to decide between making a 20 percent down payment and buying points, make sure you run the numbers. If you make a lower down payment, you may be required to carry private mortgage insurance (PMI). Check to see if this additional cost would cancel out the benefit you’d get from buying points and lowering your interest rate. The Affordable Loan Solution® mortgage from Bank of America can help eligible low- and moderate-income borrowers secure a home loan with a down payment as low as 3 percent and no PMI required.
Are points right for you?
To find out whether points could work for you, determine whether you have the cash available to buy points up front, in addition to your down payment, closing costs and reserves. Also, consider how long you plan to own the home.
Buying points to lower your rate may make sense if you select a fixed-rate mortgage and you plan on owning the home after you’ve reached the break-even period.
Under certain circumstances, buying mortgage points when you purchase a home can save you significant money over the course of your loan. But it’s important to understand how they work and how long it takes for the additional upfront cost to be worthwhile.