Everyone wants the lowest interest rate possible on their mortgage. One way to get it? That'd be buying mortgage points.
Mortgage points allow you to buy down your rate. You purchase a mortgage point -- usually for 1% of your loan amount -- and your mortgage lender knocks your rate down incrementally (typically 0.25% per point purchased).
Mortgage points are sometimes called "discount points," but the idea is the same: You pay now to save on interest later.
It sounds like a great strategy, especially if you'll own the home or investment property for the long haul, but buying points has its drawbacks, too. Let's look at all the pros and cons of buying points on a mortgage now.
Advantages of buying mortgage points
The biggest perk of buying mortgage points is obvious: You get a lower interest rate -- high credit score or not. And if you have the loan for a while, a lower rate can save you big money over time, as well as mean a lower monthly payment.
Here's an example: Say you're taking out (or refinancing) a 30-year loan for $200,000. You originally qualified for a 3.75% rate, but you purchased two points ($4,000 total), bringing your rate down to 3.25%. In this scenario, you'd break even on that $4,000 in just over four years. More importantly? You'd save about $20,000 in interest over the long haul.
Another advantage of buying mortgage points is that it's tax-deductible. If you itemize your returns, you can write off those points -- as well as any other mortgage interest you pay during the year. If you spend a good amount on points at closing, it can mean quite a significant write-off come tax time.
Finally, points can mean a lower monthly payment over the loan term. These monthly savings might even allow you to buy a higher-priced home than you originally planned for. In the $200,000 scenario above, here's how points would impact your mortgage payment: