Homebuying is an almost universally feared process riddled with intricacies. Mortgage rates may fluctuate and change over time, so how can the homebuyer save money on their mortgage? This is an important question that every potential homebuyer should want to know the answer to. But enough of the set-up, let’s see how you can score points and put them to work towards your mortgage.
The first thing to know about mortgage points is what they are. Your mortgage lender may offer you the option of paying for points when you take out a mortgage or refinance on a house. When you do this, you are buying down your interest rate. In practice, homebuying points give you the ability to lock in a discounted rate on your repayment. The more points you buy, the more you save on the interest rate on the loan.
Sounds great, but how does it work? Imagine your whole loan amount is divided into one hundred percentage points. For every percentage point you purchase up front, your annual percentage rate (APR) goes down 0.25 percent. That may not sound like much, but in the context of a 30-year mortgage, the savings really do add up.
Reducing Your APR by buying Mortgage points leads to big savings in the long run.
Let’s say you have a $200,000 loan with a 4.5% APR; this will make your monthly payment $1,013.37. In this case, every point cost $2,000. If you buy one $2,000 point up front, your APR will drop to 4.25% and your payment falls to $983.88; that $29.49 per month may not seem like much, but it pays for itself in 5 years, 8 months. In the 24 years left on the loan, you’re only saving money: $10,616.40 saved over the rest of the loan.
What if you buy two points? That will cost $4,000, but the monthly payment is now $954.83. You save $58.54 every month so you break even in the same 5 years, 8 months, but you save $21,074.40 over the remainder of the loan’s duration.
At this point, we hope it’s clear to see that a little more investment at the beginning of the time in your home will save you some serious money in the long run. Now, there is a limit on the amount of points you can buy. In the above case, you couldn’t buy 18 points to drive the APR to 0%. It is also worth remembering that your APR is separate from your mortgage rate, which means you’ll still pay some amount of interest on that mortgage payment. To some extent this is unavoidable, and not even buying mortgage points can affect that. Your savings on the APR can help, though. However, because the APR is a government calculation and the mortgage rate is set by the bank, the math on the APR savings only works on a full thirty-year mortgage. This is because the APR is set by the government while the bank sets your mortgage rate.
Is purchasing mortgage points the right move for you? Depending on your current financial state, you may not be in the position to invest more into your house right away. No matter what position you find yourself in, the Metropolitan Title team is on your side to make your homebuying process the best it can be.