Should You Buy Mortgage Points?

Mortgage buy down points are a way to lower your interest rate by paying for interest upfront. Origination fees are a similar instrument used for the same purpose. You pay an upfront fee to lower your interest rate. Some lenders even include these in their quote without properly explaining them to borrowers which essentially makes their quote seem better than it really is.

Do not be confused as some loan products such as VA and USDA mortgages have a funding fee built in. These are not the same as buy down points or origination fees. So if you are comparing one of these types of mortgages, you will have a different type of funding fee that will be the same regardless of the lender you choose. However, a lender may still be allowed to include a separate funding fee or buy down points.

The cost for buy down points and origination fees can vary. However, a general rule of thumb is 1 point buys down the rate 1/8 (or .125%) and costs 1% of the mortgage balance. To put that in perspective, on a $300,000 mortgage .125% would lower your month payments by $22 and cost $3,000 upfront. So it would take 136 payments to make back up the cost.

If you are payment sensitive or plan to be in a home for a long time, this might make sense. Builders are also sometimes known to offer rate lowering promotions such as these. You could also have this paid for you part of a negotiated seller concession. Also, some lenders might let you roll this back into mortgage.

It is worth noting, that sometimes the price difference between rates is minimal. In such a case, a buy down point might cost a lot less. Using the same example, if you could buy a 1 point buy down for .5% of the balance and get it rolled back into your mortgage it might make a lot more sense. Your payment would be $22 lower, no upfront cost, and you would make up the $1500 difference added to your note in only 5 ½ years.

A good loan officer will check into these sorts of savings opportunities for you. If you have questions about points or would like to as discuss other creative financing options, please contact us.