Should you pay points in exchange for a lower mortgage rate?
By Academy Mortgage Corp.
Fluctuating mortgage interest rates always change the way consumers view the housing market. When rates go down, it's time to buy; when rates go up, making a purchase is a little bit less attractive.
However, there are ways for prospective homebuyers to acquire an affordable mortgage, even when rates are on the rise. Now, at a time when rates are trending up overall - despite the first two weeks of 2017 seeing modest declines - home shoppers are looking for options.
What are points?
One of those options is buying points to reduce the overall mortgage rate, a strategic move that costs a little bit more upfront, but could save a homeowner money in the long run.
"Discount points are like pre-paying interest."
Points vary in price depending on the mortgage, but they are always equal to 1% of the loan. So, one point for a $150,000 mortgage would cost $1,500. There are two different types of points: origination points and discount points, explained Bankrate.
Origination points are charged by the lender as a fee for creating the loan. They have no effect on the overall mortgage rate.
Discount points, on the other hand, are like pre-paying interest. They're an option you can choose, but don't have to. If you have a mortgage rate of 7% and choose to pay 2 points, you might be able to walk away with a 6.5% interest rate instead. This will save you a small amount of money each month. Over the years, you'll make up the difference and accumulate substantial savings.
Points becoming more prominent
In recent years, residential mortgage rates have been relatively low. The average interest rate in 2016 was 3.65%, according to Freddie Mac. One decade prior, it was 6.41%. Since rates were at historic lows, fewer homeowners were concerned with buying points. But as rates continue to increase, this option is beginning to come up in conversations with lenders and real estate agents more frequently, according to Builder Online.
"The rate hike has led to a conversation that I haven't had in a long time: the ability to buy down your mortgage rate," Arto Poladian, a Los Angeles-based real estate agent said, according to Builder Online. "It does mean having to pay more up front, but it is a powerful way to keep your monthly mortgage payment within the budget you set when rates were still below 4%. Now that rates are on an upward trend I expect more people will be exercising this option."
Is it worth it?
There's no clear-cut answer to whether paying points in exchange for a better mortgage rate is the right way to go. Everyone's situation is different, and, as noted by The Truth About Mortgage, pricing for points isn't based on any specific mathematical formula. Because of this, there's usually a point at which paying points is worth it and others where it isn't.
Before deciding whether to pay points or how many are best, look at all the options. Calculate how much you'll pay throughout the life of the loan with no points, with two points, and so on. Additionally, take into consideration how long you'll stay in the home. Be realistic; If you move in three years, paying points might not be the most cost-effective option, while staying for 10 years could save you a few hundred dollars.
Academy Mortgage is one of the top independent purchase lenders in the country as ranked in the 2015 CoreLogic Marketrac Report. Visit www.academymortgage.com to find a loan, get a rate, or calculate your payment today.