Is buying a lower mortgage interest rate worth it?
Buyers can actually buy a lower interest rate by buying points, essentially putting more money in the deal up front.
It's a long-term strategy that is not right for everyone, though.
Let's look at how it works.
You buy down the mortgage by purchasing points. A typical deal would be a mortgage company offering a 0.25 percent rate reduction in exchange for one point. One point equals 1 percent of the home's purchase price. On a $200,000 home loan, paying an extra $2,000 reduces the mortgage from 4.25 percent to 4 percent.
That does lower the monthly payment, but not by much. You would save about $30 a month. But, the key is, over the life of the loan, you save big.
On a 30-year, 4.25 percent fixed mortgage for a $200,000 home, you pay about $154,000 in interest over 30 years.
Lower that rate to 4 percent and you save over $10,000 in interest.
But, again, it's not for everyone. If you are planning to sell your home well before the 30-year mortgage is paid off, then run the numbers before you buy a lower rate. In our example, it takes 67 payments — or five and a half years — to recoup your 1 point buy. The longer you stay in that home at a lower interest rate, the more you save.
Also, remember that unless you have 20 percent equity in your home, you might need private mortgage insurance. It might make more sense to use that $2,000 on the downpayment.
It is possible that buying points could have a tax benefit, but consult a tax professional to find out.