Extra Points: Reduce Rates by Playing the Game Right

If you’re ready to buy a home and the monthly mortgage payments are a bit higher than you had counted on, or the interest rate is a little hard to swallow, there are simple steps you can take to make those numbers seem less intimidating.

Banks love getting money up front, even if it means losing out a little bit later. It mitigates their risk and gives them something to play with in the short-term. If you have some extra cash on hand, or if you can save up, one option you might consider is “buying down the rate.” Buying down the rate is exactly what it sounds like – you purchase a number of points (a.k.a. “discount points”) from your lender at closing time and in return you receive a reduced interest rate.

Essentially, with discount points, you are paying a certain percentage of the interest up-front, usually 1% per point, or $1000 for every $100,000 of loan. In exchange for the purchase, the interest rate is reduced by a varying degree. Reduced interest rates mean lower monthly mortgage payments and overall a cheaper mortgage. Zillow offers a handy calculator here.

It’s important to have somewhat of an idea as to how long you plan on owning your home, because it will take a good amount of time for this investment to pay off. To find this point you divide the up-front point cost by the monthly savings. As you can see, this is a long game, but the savings can be substantial.

So that’s the catch, you have to be sure you will be owning the home for long enough to recoup your costs. About half of all homeowners make it 10 years, so the odds are in your favor that you will come out ahead, but only you can make that assessment.

We’d be happy to talk to you about reducing rates. Give Blue Water Mortgage a call today.