Before talking with a Mortgage lender, know what points are, also known as discount points.
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 upfront in exchange for a lower interest rate over the life of your loan.
Doesn't sound like a bad deal, huh?
However, if you only plan to live in the home for 2-3 years it may not financially make sense. Since the start of 2022, mortgage rates have risen sharply, and that might make mortgage points seem more attractive to many borrowers. In general, the longer you plan to own the home, the more points help you save on interest over the life of the loan. This might be very plausible when rates were at all-time lows near 2.5 percent, but with rates at 4.5 percent, you’re more likely to be looking to refinance if we see a drop in rates.
When you consider whether points are right for you, it helps to run the numbers.
Basically: Points could be a good way to go if you want to set and forget your mortgage, but if you plan to manage the account more actively and refi into a lower rate if the market recedes, it might not be worthwhile to buy them now.
