Mortgage rates keep dropping to fresh all-time lows, but homebuyers can get even steeper markdowns by using what are called discount points. These are optional fees you can pay the lender to bump your mortgage rate down a bit.
But that’s the catch.
"You have to be willing to pay for it," says Nicole Rueth, producing branch manager of Fairway Independent Mortgage Corp. in Englewood, Colorado. "You can get your rate into the 1s or low 2s, but how much are you willing to pay — and when does it stop making sense?"
Discount points won’t benefit every mortgage shopper. So before you buy down your interest rate, be sure you understand how points operate and whether they’re worthwhile.
How do discount points work?
Mortgage points are one way to lower your interest rate. If you buy one point, it usually costs 1% of the loan amount — so you would pay $2,000 to buy one point on a $200,000 mortgage. One point typically lowers your rate by 0.25%, so a 3% rate would fall to 2.75%.
But those are estimates. There’s no set price tag on points, and no hard-and-fast rules for how much they lower your rate. That’s why it’s important to "ask your lender about your spread of options," Rueth says.
Get multiple rate quotes and ask each lender how its points system works.
If you see a spectacular mortgage rate advertised somewhere, look closely. The fine print might tell you that the rate comes with points. For example, the loans in the widely Freddie Mac mortgage rates survey, which hit an all-time low this week, came with an average 0.8 point.
So, to get a drool-worthy rate, you may need to shell out an extra fee.
Any points should be listed on your loan estimate, an official document which the lender is supposed to provide at least three days after you apply for a mortgage. You pay points at closing, along with the other closing costs.
How do I figure out if points are worth it?
The answer comes down to whether you keep the mortgage past your "break-even point." That’s when the money you save via your monthly mortgage payments reaches the amount you paid to buy points. After this time, you start saving money for real.
If you think you’ll refinance your mortgage or move before you break even, then you'll lose money on the discount points you paid.
To figure out your break-even point, open the calculator app on your phone or computer.
Let’s say you get a quote for a 30-year, $200,000 mortgage at a fixed 3%, and your monthly payment with no points is $975. You want to buy one mortgage point for 1% of the loan amount, or $2,000. It will allow your interest rate to drop to 2.75% and your monthly payment to fall to $954 — saving you $21 a month.