Mortgage Points and Buying Down Explained.

Mortgage Points and Buying Down Explained.

Mortgage points, also known as discount points, are a type of upfront fee that a borrower can pay to lower the interest rate on their mortgage loan. Each point is equal to 1% of the total loan amount.

When a borrower pays points, they are essentially prepaying some interest on the loan. The more points paid, the lower the interest rate and monthly mortgage payments will be over the life of the loan. However, it’s important to note that paying points upfront will increase the initial closing costs of the loan.

Buying down points refers to the process of paying additional upfront fees to lower the interest rate on a mortgage loan. For example, if a borrower is offered a 4.5% interest rate on a 30-year fixed-rate mortgage, they may have the option to pay one or more points upfront to reduce the interest rate to 4.25% or even lower.

The decision to pay points and buy down the interest rate will depend on several factors, such as the borrower’s financial situation and how long they plan to stay in the home. It’s important to weigh the upfront cost of paying points against the potential savings in interest payments over the life of the loan.