When you use financing to buy a house or apartment, your monthly mortgage payments are determined by several factors that include your interest rate—but the rate you’re offered is not always the final word.
If you happen to have some extra cash (lucky you) or are getting some kind of closing credit, one of the ways to lower the cost of borrowing is to buy mortgage points—also known as “buying down the rate,” “prepaid interest,” or “discount points.” Eli Sklar, a senior loan consultant at LoanDepot says. “Sometimes the lowest rate is not available unless you pay upfront to lower the rate for the life of loan.”
How the math works: One point costs 1 percent of your mortgage amount, or $1,000 for every $100,000. So one point on a $400,000 mortgage would cost $4,000. By making a single, one-time payment at the closing table, qualified applicants can permanently reduce their monthly payments every month. Here’s an example of buying points that would lower the rate by .25 percent. If you have a rate of 3 percent and are willing to pay one point, you would lower the rate on a 30-year mortgage to 2.75 percent for the life of the loan, cutting your payments each month from $1,686 to $1,633, a savings of $53 dollars each month.
Does paying for points make sense?
To determine if it’s worthwhile to pay for points, consider how long it takes to break even, and how much is being saved over the life of the loan after that point, Sklar says.
“In this case, $4,000 in costs divided by $53 in monthly benefit tells us that this buydown pays for itself roughly in the first six and a half years for a 30-year loan. In the remaining 23 years, the homeowner would recoup over $15,000 in interest charges,” he says.
“It is up to the homeowners to decide what makes sense for them. Especially in New York City, where the average length of time that a buyer keeps a mortgage is about seven years, this can definitely change the equation.” Sklar says.
Life happens: Jobs change, children grow up and out of schools. As a buyer you might think you’re going to stay in a property for a long time but end up changing course—and that’s an important consideration when paying for points.
An important consideration in NYC for buyers is having enough to pay your closing costs, including taxes, attorney fee, title insurance and more. In addition, co-op buildings can have steep requirements for post-closing liquidity. Some buildings want to see a year’s worth of mortgage and maintenance in an escrow account, some may want to see up to two years. In other words, you don’t want to spread yourself too thin. You can read more here.
Our team is here to advise you on what works best for you and your family. We work with the very best mortgage brokers in the city. We are also excited to share that Compass is launching its own mortgage company, OriginPoint, with the goal of shortening the time to close and to help reduce uncertainty and risk within the closing process.