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There’s a lot to learn when it comes to buying a house, especially if you’re going through everything for the first time. While you might already be aware of some of the basics, such as what a down payment is or how lender fees work, other topics like mortgage points may not actually come up until you’re knee-deep in the homebuying process.
Below, Select takes a closer look at what mortgage points are and how they can potentially save you some serious money over the life of your loan.
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What are mortgage points?
Mortgage points are fees a homebuyer can pay upfront in exchange for a slightly lower interest rate. This is also referred to as “buying down the rate,” and is something that could potentially save you a lot of money over the life of your loan.
As with any other form of debt, interest charges can really eat into your budget and make it more costly to borrow money — especially when you need to take on such a large loan to pay for your house — so, it’s easy to see why purchasing mortgage points can help you save some money in the long-run.
How do mortgage points work?
One mortgage point will typically cost 1% of your loan amount and lower your interest rate by about 0.25%. If you were to take on a $200,000 loan, for example, one mortgage point would cost $2,000 and land you a 0.25% discount on your interest rate, while two mortgage points would cost $4,000 and lower your interest rate by 0.5%.
The cost for each mortgage point depends entirely on your loan amount — in other words, the larger your home loan is, the more you’ll need to pay for each one. Keep that in mind for budgeting reasons when it’s time to figure out how much money you’ll need to pay upfront to buy your home.
How much money can you save from mortgage points?
The amount of money you’ll save over the life of your loan depends on how much of a loan you’re taking on, how many mortgage points you’re buying upfront, what your interest rate reduction is and the length of your loan term.
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