Mortgage rates have hit record-setting lows time and time again in 2020, offering Americans a chance to save big when either buying a home or refinancing their existing one.
Those bargain-basement rates aren’t available to just anyone, though. The lowest rates are usually reserved for borrowers with the best credit. So increasing your credit score? That can help your case a lot. Because rates vary from one lender to the next, so can shopping around for your mortgage company.
If you’re willing to do some careful calculations, there’s also a third, lesser-known way to snag a low interest rate and save cash over the long haul: Buy mortgage points.
What are mortgage points?
When you apply for a home loan, you’ll have the opportunity to buy mortgage points. Each point costs 1% of your loan amount and lowers your interest by a small, fractional amount.
“Mortgage points — or discount points — allow you to pay more in closing costs in exchange for a lower mortgage rate,” says Lucy Randall, director of sales at mortgage lender Better.com. “That means you’ll have a bigger upfront fee, but a lower monthly payment over the life of your loan.”
Many people call paying points “buying down your rate.” The exact amount that a point can lower your rate varies, depending on your loan, lender and the overall investment market. Usually, it’s anywhere from one-eighth to one-quarter of a percent, Randall says.
Here’s an example of points in action: Say you were quoted a 3.5% interest rate on your $200,000 loan but were really hoping for a 3% rate. Points could help you achieve that.
According to your lender, a point is currently worth 0.25. That means to lower your rate by 0.50, you’d need to