Maximizing Your Mortgage

General

Apr 27

How Mortgage Points Work

Learn everything you need to know about mortgage points in this quick video. We'll explain what they are, when to use them, and how they can impact your mortgage payments and overall costs.

Whether you're a first-time homebuyer or a seasoned pro, understanding mortgage points is an essential part of the mortgage process.

Watch now to learn more!

More of a reader? Catch the video transcript below!

So today’s Good Friday, and I didn’t know this but apparently, it’s one of the busiest golf days of the year. What do golf and mortgages have in common?

Par!

In golf, par means a score of zero. Well, there’s something called a par rate when you get quoted a mortgage. It means you’re not paying anything extra and you’re not getting any credits.

Let’s say, for example, today the par rate is 6%. So, if you want to get your mortgage rate down from 6% to 5%, you can pay something called points.

What are mortgage points?

Points are a percentage of the loan amount. So, if I’m getting a $500,000 mortgage and I want to go from 6% to 5%, the cost to do so might be one point. In this example, one point = $5,000 (1% of the $500,000 mortgage).

You can also go in the other direction. If you’re willing to take your mortgage rate from 6% to 7%, you can get credits. Basically, the lender will give you points and pay you money in order to send your rate upward.

So basically, par rate is zero. If you want to go down in rate, it’ll cost you money. If you’re good with a higher rate, you get money in the form of credits from your lender.

When does it make sense to pay mortgage points?

You might be thinking, “Well, of course I want a lower rate. Why wouldn’t I pay points to get that lower rate?”

It’s not necessarily always the best option. Let’s say it costs you $1,000 to move your rate down one point (these aren’t actual numbers, but for the sake of the argument, this is how we’ll do the math). Let’s say that $1,000 lowers your monthly payment by $100. So, in order to make up that $1,000 that you paid, you’d need to save $100 a month of 10 months. By month 11, you’ve saved $1,100 and everything else is icing on the cake for the rest of your loan. So, paying $1,000 to save $100 a month makes sense as long as you’re in the home for longer than 10 months (which is your break-even period).

To find out if mortgage points make sense for you, you’ll want to do a break-even analysis for yourself. Weigh how much the lower interest rate costs and how much savings you’d experience in exchange to get the number of months it’d take you to break even.

If you want to lower your rate with points, it’s quite a bit of money upfront for a pretty small savings in the monthly payment — so often, the break-even point may be 8, 9, 10 years out in the future. That’s where it becomes kind of a gray area, because on average, people are in their home for about 10 years. You need to think realistically about the amount of time you plan to be in the home. You’ll also want to consider whether you might refinance your mortgage in the future if rates lower.

There’s a lot that goes into whether or not it makes sense for you to buy points, so get in touch with your mortgage professional or real estate agent and they can help you do the math and find that break-even number.

The bottom line: Make sure that you’re factoring in your personal timing and do the math to make sure that buying points makes sense for you.

That’s it for me today, friends. Thanks for being here, and I’ll see you in my next one!

Brent Edwards (aka Brent the Broker) is a residential real estate agent and Realtor in San Diego, CA who helps clients buy and sell homes in San Diego, California and all surrounding areas. Brent is a highly-recommended Realtor in San Diego by family, friends and past clients. Call Brent today at 619-550-8070 if you have any questions about real estate in San Diego or you'd like to buy or sell a home.