Mortgage rates are hitting an average high of 5%. Mortgage rates have been steady in recent years around 4%, but TransUnion credit bureau predicts that these rates will rise to 5% by the end of 2019.
Along with the rising interest rates, the housing prices are steadily rising as well. Near the end of 2018, the median home price in the U.S. was $276,000. Rising interest rates and increasing housing prices has brought back a home-buying strategy into popularity.
The strategy is commonly referred to as a “points” system, and it could help you save on your mortgage in the long run.
What are Mortgage Points or Discount Points?
Many lenders have the option to earn “mortgage points” or “discount points” as part of their services. What does this mean? Let’s break it down.
Each point is equal to 1% of the total amount borrowed. For example, on a $100,000 mortgage, one point would equal $1,000. Often, points don’t even have to be whole.
In a breakdown by Consumer Finance Protection Bureau, the organization shows how a fractional 0.375 points compare to zero point 5% interest rate loan on a $180,000 mortgage.
In the scenario where the borrow paid the 0.375 points upfront, they pay an extra $675 in closing costs on the $180,000 loan. It’s a cost upfront — and it doesn’t go towards the mortgage — but it can save money in the long run. In this example, the borrowers would receive a 4.875% interest rate (versus 5%) with their fraction of a point. That totals up to $14 per month savings throughout the loan on a 30-year mortgage that adds up to significant cost savings.
Are Points the Right Choice?
Upfront, it can seem to make sense to save the money over the life of the loan — but there are a few things to consider.
If you don’t plan in being in your home for at least five years, you won’t experience the cost benefits of paying for the points. Additionally, if the paying for points is going to reduce your down payment enough that you will have to buy private mortgage insurance the costs will be overshadowed with that.