Points Mortgage

A points mortgage involves paying upfront fees, known as 'points,' to secure a lower interest rate on your mortgage. One point typically equals 1% of the loan amount, and paying points can lead to significant savings over the loan term. For example, on a $300,000 mortgage, one point costs $3,000. If this payment lowers your interest rate from 4% to 3.5%, you could save around $50 per month, which adds up to $18,000 over 30 years.

A common misconception is that paying points is always beneficial. While it can lower your monthly payments, it's essential to calculate how long you plan to stay in the home. If you move after just a few years, you might not recoup the upfront costs. For instance, if you pay $3,000 for points but only stay in your home for three years, you'll have spent more than you saved compared to a no-points mortgage.

Another mistake is failing to compare the total costs of different mortgage options. Always analyze the break-even point—the time it takes for the savings from a lower interest rate to surpass the cost of the points. In our example, if paying $3,000 lowers your payment by $50, it would take 60 months (or 5 years) to break even. If you plan to stay in the home for longer than that, paying points could be a smart move.

Key takeaway: Consider your long-term plans and calculate potential savings versus upfront costs before opting for a points mortgage. This way, you can make an informed decision that aligns with your financial goals.