Half of Homebuyers Don’t Know This Mortgage-Saving Secret

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Today, purchasing a home presents financial challenges for many. The ripple effects of the COVID-19 pandemic led to increased mortgage interest rates, soaring rents, and a shortage of available properties.

Thankfully, inflation is finally easing, with the U.S. Bureau of Labor Statistics reporting a current rate of around 2.4%.

As a result, homes are becoming a bit more accessible financially. But there remains a valuable strategy unknown to half of today’s homebuyers: buying points. These points, often referred to as discount points, can significantly lower your mortgage costs.

Understanding the Advantage of Buying Points

Approximately 50% of today’s homebuyers are leveraging a tactic known as buying points to reduce mortgage costs, a strategy detailed by CNBC. This involves a payment to your lender at closing, effectively reducing your mortgage’s interest rate. Typically, one point costs about 1% of your loan amount, translating to a 0.25% decrease in your interest rate.

Is Buying Points the Right Decision for You?

Buying points can be a savvy move if you plan to stay in your home over the long haul—usually requiring about five to seven years to break even on the investment. An appealing perk is the tax deduction potential, as the cost of these points often qualifies as prepaid mortgage interest, provided you itemize deductions on your primary residence.

Exploring Alternatives to Buying Points

For those who might not find buying points appealing, two viable alternatives exist to lower your payments. First, consider a 2-1 buydown. This option generally costs 1% to 2% of the loan, offering a temporary rate reduction for the first two years before reverting to the standard rate. Alternatively, opting for a larger down payment can serve as a strategic choice. Putting down 20% or more not only reduces your mortgage balance but also helps you avoid the additional cost of private mortgage insurance (PMI), which can be a significant monthly expense.

For those navigating the complex landscape of home buying, knowing how to manage mortgage costs can make a meaningful difference. Empower yourself with knowledge and explore these strategies to make informed financial decisions.

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