It’s no secret: Americans love to get a deal on something – anything.
We see it every day in our dollar menus, gas club member incentives, rewards cards, and we also see it in a not so obvious place: in buying points.
You may not be aware that buying points exists, but if you have ever been in the market for buying a new home and needed a loan or mortgage, you certainly have probably had an encounter with being offered them. The commercials and advertisements that you see from private lenders who are able to offer almost too-good-to-be-true interest rates? Those are buying points, and while they could be beneficial, the ultimately could be detrimental as well.
When you are quoted an interest rate, you will be presented with the opportunity to pay more upfront in the form of what’s called points, according to Business Insider (BI). Each point equals 1 percent of the loan; for example, if your loan is $100,000, one “point” will be $1,000, two points will be $2,000, and so on.
The appeal of buying points at the time of mortgage closing, says Business Insider, is that you may reduce the interest rate of your loan from 3.75 percent to 3.5 percent, which could lower your monthly by about $25 on a $200,000 loan over the life of 15 years. A 30 year mortgage has similar benefits, and more money involved over a longer lifetime means you could potentially save up to $75 on your monthly payment.
Most people, however, believe it doesn’t make sense to take this option.
Given the apparent benefits, BI estimates that it will take about 8 years to “break even” from buying points. What does that mean, exactly? When you purchase buying points, while you may be lowering the interest rate, it does nothing to change the overall amount of the loan. The reason it takes so long to break even is because the monthly savings you gain from buying points is only a fraction of the total cost. One should also consider how long the plan to stay in one place when taking this approach as well. If you plan on refinancing in under 8 years, or moving in under that amount of time as well, which is less than a 15-year mortgage, you could find yourself paying more money overall.
While mortgage points are tax deductible, many people would agree that there seems to be more risk involved than benefits. For more information on mortgage points and if they’re right for you, please contact Valley West Mortgage.