Lowest Mortgage Rates Are Great, But Don't Forget the Points
Best mortgage rates only part of the big home loan picture
Make no mistake: finding the lowest mortgage rates possible is likely to be the single biggest factor in driving down the total cost of your home ownership. But mortgage points remain an important part of the equation, and discount points can significantly reduce your monthly home loan payments.
What are mortgage points?
In its PDF brochure, "Looking for the best mortgage: shop, compare, negotiate", the U.S. Department of Housing and Urban Development (HUD) explains that points are paid by the borrower to the lender as part of the closing costs of a real estate purchase.
One point equals one percent of the loan amount. So a $100,000 mortgage loan with points totalling 0.7 would require the purchaser to come up with $700--plus, of course, other closing costs. Usually, buyers pay for points out of savings, but you may be able to add them to the loan amount.
There are two types of mortgage points:
- Origination points
- Discount points
Origination points
Mortgage loan origination points are the fees paid to the lending institution to cover some of its set-up costs (you may well be asked to pay other fees for loan origination, underwriting, brokerage and other costs), and they're often used to compensate loan officers. It's worth paying some attention to these as they can vary quite considerably over a short period. For example, the Mortgage Bankers Association says that over the course of one week in September 2010, points on a 30-year, fixed-rate mortgage fell from 1.45 to 0.87.
Back in August 2010, The Boston Globe reported: "Today, it is possible to lock in a 30 year mortgage with no points and no closing costs at 4.375 percent." Don't expect such deals to be generally available (they're exceedingly rare), and the Globe went on to say that those who might qualify would:
- Have a great credit history
- Want to borrow $275,000 or more
- Have a loan-to-value ratio of 80 percent or better
However, such deals do illustrate that origination points are far from fixed, and the ones you're initially offered may be open to negotiation, particularly during times when borrowers are thin on the ground. It's certainly worth trying to haggle with mortgage brokers and lenders.
Discount points
Discount points are far more interesting than the origination ones. That's because these allow you to buy a lower mortgage rate in exchange for an upfront payment. Of course, whether you choose to buy discount points may partly depend on whether you have the resources on hand to do so.
As for origination points, one point costs you one percent of the loan value, and each discount point you buy (most lenders limit you to three) is likely to reduce your rate by about 0.25 percent. It's probably easiest to use the shoprate.com mortgage calculator to perform a cost/benefit analysis for your particular circumstances. But let's do a sample calculation.
Best mortgage rates get better
Suppose you're negotiating a $100,000 30-year, fixed-rate mortgage at an interest rate of 4.6 percent. Without any discount points, your monthly payments are $512.64, in which case your total payments over the lifetime of the loan would come to $184,552. What happens if you buy points?
Buying one point would add $1,000 to your closing costs (one percent of the loan value), and would--if your lender is like most--reduce your rate by 0.25 percent to 4.35 percent. The mortgage calculator says that your monthly payments would drop $14.83 to $497.81. That may not sound a lot, but over the 30-year life of your mortgage loan your $1,000 investment would save you $5,340.
Buy three discount points for $3,000, and your 4.6 percent rate will fall to 3.85 percent. Compared to having no discount points, you'll be paying $43.83 less each month, which is $15,781 over the 30-year term.
Is buying discount points worth it? The answer is often yes. But purchasing a home is an expensive business, and many at such times simply have better things to do with their cash.
