On The Money

Does Buying Down Your Mortgage Rate Make Sense?

decreased mortgage rate illustrationPaying for mortgage points is one of the most common ways to get a lower interest rate. Sometimes called discount points, they’re the prepaid interest you pay at closing. Each point is equivalent to 1% of the loan amount, so the cost will depend on how much you will borrow. Mortgage points are often confused with loan origination fees; the former is optional, while the latter covers the loan officer’s or the mortgage broker’s commission.

Are mortgage points good or bad? Only you could answer that. Generally, they make sense when:

You Want to Buy Now, but Your Credit Score Isn’t High Enough

Mortgage points help you buy one the most affordable new homes for sale in Kansas City, MO — with better interest without increasing your credit score. Normally, as Brookfield Residential explains, having a credit score of 740 or higher is the key to snag the lowest mortgage rates. A less-than-perfect credit takes time to build, and buying discount points is one way to avoid the wait. If you can pay thousands of dollars at closing, your prospective lender can make your loan’s interest more favorable.

You Plan to Stay for the Long Haul

Buying down your rate isn’t a good move if you don’t have plans to keep it for many years. In loan amortization, most of the initial repayments go toward the interest. You could only reduce your principal significantly starting the middle of the term. If you plan to sell your property and pay off your loan early, paying extra for mortgage points won’t save you on interest.

You Have No Plans to Refinance

Mortgage rates these days are historically low, so the likelihood that you would refinance your loan in the future is a bit low. If you think tomorrow’s rates aren’t going to beat today’s, then driving down your interest with mortgage points is a sound decision.

Mortgage points are at your disposal to save you money for the years to come. Considering the uncertainty the future holds, however, it’s best to calculate the risks to see whether they’re worth the large sum of cash.