With homes becoming increasingly unaffordable, more buyers are using an increasingly popular strategy to lower their mortgage rate.
Buying points — also referred to as “discount points” or “buying down the rate” — involves paying extra to your lender at closing to reduce the interest rate on a mortgage. That reduced rate results in smaller monthly payments and long-term interest savings over the life of the loan.
Typically, paying a fee worth 1% of your loan amount, known as a point, reduces your interest rate by around 0.25%.
The practice has become more common as rates have climbed, with 49% of buyers choosing to pay down the rate in 2023, according to online broker Zillow’s most recent data. That’s nearly double the 27% of people who reported using the strategy in 2019.
“Buying points is extremely popular today, as borrowers try to get rates closer to the historic lows of the pandemic,” says Aaron Gordon, branch manager at Guild Mortgage. However, he says that the decision is a “personal one” since “what makes sense for one borrower doesn’t necessarily make sense for another.”
How to know if buying points is the right strategy for you
Buying points is typically better suited for long-term homeowners because it can take several years — usually five to seven — to break even on the upfront cost savings on monthly mortgage payments.
One immediate benefit: the cost of the points is tax deductible as prepaid mortgage interest (as long as you itemize deductions and the home is your primary residence).
However, for some buyers, putting extra money toward the down payment can be a smarter option than buying points. A larger down payment reduces the total loan amount, which also has the effect of lowering monthly payments. Plus, putting down at least 20% helps you avoid private mortgage insurance (PMI), which can be more than $100 month on a $300,000 loan, although it varies by credit score and the size of the down payment.
Ultimately, whether a larger down payment or buying points will actually lower your monthly payments depends on your specific loan terms.
contact Mac Church at mchurch@acmllc.com for more information or to get a free financial analysis for purchasing a home.
