Buy Down Your Mortgage Rate
One way of doing so is to buy down your mortgage rate. This is accomplished by paying for mortgage points. These mortgage points — sometimes they’re referred to as closing points or discount points — are a fee that is paid to the mortgage broker or lender. In exchange for the payment of mortgage points, you receive a discount. For example, one percent of the loan’s total amount for each mortgage point paid.
Mortgage Points Explained
Think of mortgage points as a way to use cash at the closing of your home to pay down your interest rate so it’s lower. In essence, mortgage points are prepaid interest that you pay for upfront so you can receive a lower mortgage rate during the loan’s term.
Can Mortgage Points be a Requirement?
There are some cases when approval of the loan rests on the payment of a certain number of points. In most cases, this is tied to the buyer’s monthly payment. Because paying the mortgage points will reduce the monthly payment, it could make the difference in keeping your housing costs to an acceptable level for your income.
Some experts state that your total housing costs — including your monthly mortgage payment, property taxes, mortgage interest and maintenance — should comprise no more than 30 percent of your income. However, many mortgage lenders follow the “28/36” rule when it comes to approving mortgage loans. This rule states that only about 28 percent of your gross monthly income should be spent on housing costs. Additionally, you shouldn’t have more than 36 percent of your gross monthly income tied up in debt. Examples of such debt include housing costs, as well as car loans, credit card bills and student loans.
Is Paying Down Your Mortgage Rate Always a Good Idea?
Paying down your mortgage isn’t a universal solution that works in every situation. Some potential home buyers simply might not be able to save up thousands of dollars — on top of a down payment — in order to pay for mortgage points.
Paying for mortgage points is also recommended only for those homeowners who plan to stay in their homes for a number of years. In that way, they can reap the benefits of saving on their monthly payment for a long enough time period to make paying for the points worth it. In most cases, this means living in the home for at least five or 10 years.
If you have the options of buying down your mortgage rates in the form of purchasing points, be sure to do your math to determine if it makes sense for you to do so. You should also map out your projected long-term goals to determine if you’ll live in the house long enough to make paying for points worth it.