What is a Mortgage Basis Point, and How Can They Work for You?
You’ve probably heard the term “points,” “basis points,” or “mortgage points” tossed around before. But what do they mean? More importantly, how do they play into your home purchase and mortgage costs?
To start, it’s important to understand the basics of mortgage rates. Though you’ll typically see rates expressed as percentages, like 5.25%, for example. You can also use basis points to describe them. (That 5.25% would equal 525 basis points).
Typically, basis points are used when describing increases or decreases in rates. So, if rates went from 5% to 5.25%, you might say rates increased 25 basis points.
In the grand scheme of things, basis points aren’t going to play a role in your home purchase or mortgage loan. Mortgage points, though — sometimes called discount points — will. They may even help you get a lower interest rate.
Here’s What You Need to Know About Mortgage Points and What they Mean for Your Mortgage Loan:
Mortgage points — or discount points — are something you can purchase at closing.
Here’s how they work: You’ll pay a fee, typically 1% of your loan amount, directly to your lender. In exchange, they reduce your interest rate — usually by around 0.25% (25 basis points).
So, if you were taking out a $200,000 mortgage loan and were quoted a 5.5% rate, you might consider paying $4,000 in discount points (2%) to reduce that rate down to 5%. This is also called “buying down your rate.”
Keep in mind that paying discount points will increase your closing costs, so you’ll want to make sure you’re in the home long enough to reap the benefits. Use a mortgage calculator to determine how much that lower rate will save you, and then divide the total cost of the points ($4,000) by the amount it will save you per month (let’s say $75).
In this case, the breakeven point would be 53 — meaning it would take 53 months to recoup the costs of those points. If you don’t plan on staying in the home that length of time, buying mortgage points may not be worth it.
Learn More about Buying Points
Want to determine if buying points is smart for your home purchase or refinance? Get in touch with a loan officer at Embrace Home Loans today. They can help you crunch the numbers and determine what works best for your goal.