Buying discount points is a surefire way to pay less interest on a mortgage in Arizona, driving your monthly payment lower over the life of your home loan in Tempe or Phoenix, if it is the fixed-rate kind. These points, however, are not truly discounts since they are interest paid in advance. In essence, it is a gamble between you and your lender.
Obviously, the financial institution offers this option hoping to come out ahead while you get to afford a much larger property with the interest deduction. The merits of this practice are straightforward, but it is something you should consider last. Before you pull the trigger on it, consider these factors below:
1. Down Payment Size
Putting down a large amount of cash naturally decreases the money you need to borrow from a lender, making you a less risky customer. When you pay more than the minimum down payment requirement of your prospective financial institution, you may be able to negotiate a lower interest rate.
If the other party agrees but wants more cash up front, you may lock in the deal and use the time to save and to come up with additional money. This strategy allows you to not only shrink your interest rate, but also reduce your loan’s principal balance, so you have to pay extra to borrow the money over time.
If you can pay 20% of the property’s price up front, you can even ditch the private mortgage insurance altogether and decrease your monthly payment further. Each mortgage point is equivalent to 1% of the property’s price, which can be a significant amount of money, depending on the house you buy. When you can use the funds to beef up your down payment or cover the closing costs while reducing your interest rate at the same time, do not buy down your mortgage.
2. Credit Standing
A high credit score is likewise a powerful bargaining chip in the interest rate negotiation. Review your credit reports in advance to remove incorrect items in your file. Consider buying down your mortgage only your credit is still not good enough to snag the interest rate you like.
3. Prepayment Penalty
Is your lender willing to let you make extra payments toward your principal balance without charging you any penalty? If yes, use your cash to pay in between due dates instead of buying mortgage points. Regular extra payments can save you on interest indirectly, for your principal balance decreases ahead of schedule.
4. Length of Stay
It only makes sense to buy mortgage points only when you keep your loan for several years. Be governed by the five-year rule, for 60 months is normally enough time to break even and begin saving money because of the deal. To be sure, run the numbers before signing the contract.
5. Future Refinancing Plan
If you are not planning to sell your house in the near future but hopes to refinance when rates drop low enough, do not buy down your mortgage. You may qualify for a refi in less than five years, which is too short to offset the cost of buying points.
Buying down your mortgage is a tricky strategy, so cover all the bases to make a sound decision.