Buying points, also known as discount points, involves paying an upfront fee to your lender in exchange for a reduced interest rate on your mortgage. This strategy can potentially lower your monthly mortgage payments and decrease the total interest paid over the life of the loan.
A single discount point is typically equivalent to 1% of your total loan amount. For example, if you are taking out a $300,000 mortgage, one point would cost $3,000. The amount by which your interest rate is reduced per point varies by lender and market conditions, but usually ranges between 0.125% to 0.25% per point.
When considering buying points, calculate the breakeven period, which is the time it takes for the savings from the reduced interest rate to exceed the upfront cost of the points. This is calculated by dividing the cost of the points by the monthly savings achieved by the lower interest rate. If you plan to stay in your home longer than the breakeven period, buying points could be a financially beneficial decision. Conversely, if you anticipate selling or refinancing before breakeven, it may not be wise.
Buying points may also be tax-deductible if the purchase is used for your primary residence, meaning you should consult with a tax professional to understand how this benefits your specific tax situation.
Consider your long-term homeownership plans and current financial situation when deciding whether to buy points, and evaluate how the upfront cost of points compares to potential interest savings over the life of the loan.