How and Why to Pay “Points” On Your Mortgage

June 10, 2022

How and Why to Pay “Points” On Your Mortgage
Paying points – you may have heard the term, but what does it mean and why is it relevant all of a sudden? 
 
To start:
 
  • The terms “paying points” and “rate buy-down” are synonymous. 
  • A “point” is equal to 1% of the amount of a home mortgage
  • Points are fees you pay to a lender in exchange for a reduced interest rate
With rates <3% for many years, the idea of paying points evaporated, and $0 closing fees were more or less the norm. Now that interest rates have taken a notable bump (though still historically very low), the idea of a rate buy-down is starting to make more sense.
 
Click to check out the numbers below, along with a 2-minute video explainer from our rockstar mortgage broker, Dean Rizzi of Guaranteed Rate. 
 
 
In short, the idea is this: 
 
$2m purchase with 20% down and zero points – $8,589 a month 
 
$2m purchase with 20% and 2 points – $8,159/month
 
2 points in this case is $32,000. So where does that $32k come from? 
 
  • You can pay it out of pocket. In this scenario at a savings of $429 a month, you get your money back once you’ve owned the home for about 6 years. Everything after that is pure savings. 
  • You can wrap it into the mortgage. For example, you increase the purchase price to $2,032,000 and ask the seller to use that additional money to pay the points at closing. This way you’re actually financing $25,600 of the $32,000. 
  • You can negotiate with the seller. Depending on your negotiating position, you may be able to get the seller to cover some or all of the cost of the points. This can be more advantageous than a straight price reduction, as you can see in the explainer above. 
If your head is spinning, never fear! Our team has worked in all sorts of mortgage environments and markets, and we are here to guide you. If you’d love to buy but are discouraged by the rise in interest rates, call us! Things might look better than you think. 

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