Should I Buy Down My Mortgage Rate Before I Close Escrow?
What are Mortgage points?
Mortgage points are fees you pay a lender to reduce the interest rate on a mortgage. Paying for discount points is often called “buying down the rate” and is totally optional for the borrower.
How much does one mortgage point reduce the rate?
When you buy one discount point, you’ll pay a fee of 1% of the mortgage amount. As a result, the lender typically cuts the interest rate by 0.25%.
But one point can reduce the rate more or less than that. There’s no set amount for how much a discount point will reduce the rate. The effect of a discount point varies by the lender, type of loan and prevailing rates, as mortgage rates fluctuate daily.
“Buying points” doesn’t always mean paying exactly 1% of the loan amount. For example, you might be able to pay half a point, or 0.5% of the loan amount. That typically would reduce the interest rate by 0.125%. Or you might be given the option of paying one-and-a-half points or two points to cut the interest rate more.
How do mortgage points work?
Paying discount points reduces the interest rate and therefore the monthly payments. Your monthly savings depends on the interest rate, the amount borrowed and the loan’s term (whether it’s a 30-year or 15-year loan, for example).
Should you buy points?
Sometimes buyers may have credits (money towards closing costs; credited to them by the seller from inspection findings such as a cracked sewer line or faulty electrical, for example) which they can sometimes use to "buy down their rate". As this is a case by case basis determined by the lender, it is good to ask your mortgage broker or lender first. You can still buy down the rate, with your own money even if the lender does not allow credits towards closing costs to be put towards this.
The decision whether to pay points comes down to whether you will keep the mortgage past the “break-even point.”
The concept of the break-even point is simple: When the accumulated monthly savings equal the upfront fee, you’ve hit the break-even point. After that, you come out ahead. But if you sell the home or refinance the mortgage before hitting break-even, you lose money on the discount points you paid.
The break-even point varies, depending on loan size, interest rate and term. It’s usually more than just a few years. Once you guess how long you’ll live in the home, you can calculate when you’ll break even.
It may make sense to pay discount points when you’re buying a long-term investment property or a home you plan to hold for many years