| Mortgage points may help homebuyers lower monthly costs amid high interest rates. How to know if this strategy is right for you | | |  | WED, JUN 21, 2023 | | | | With interest rates expected to remain high for the foreseeable future, home buyers are scrambling to find the lowest rates and to beat the market.
One option for home purchasers is to buy down their interest rate. Buying down the rate means paying an extra upfront fee to get a lower interest rate and a lower monthly mortgage payment. This strategy is referred to as buying mortgage points.
Like any financial strategy, there are pros and cons to consider.
The biggest advantage of buying down interest rates is that you get a lower rate on your mortgage loan, regardless of your credit score. Lower rates can save you money on both your monthly payments and total interest payments over the life of the loan.
Also, first-time home buyers who anticipate staying in their homes for a long time may find buying down their interest rates to be a good decision. That's because the early years of homeownership can be more expensive, and first-time home buyers' incomes may be lower. A better rate can drop your monthly payments and even help you qualify for a more expensive home.
The primary drawback to buying down your mortgage rate is that it increases the upfront cost of buying a home. Your monthly payments will be lower, but you need to "break even" for those savings to be worth it. That means you should plan to keep the home loan long enough that your total savings outweigh the upfront cost of buying points.
Buying points also ties up your liquid cash. You may have better uses for that money; for example, paying off high-interest credit card debt, making investments, or saving for future home improvements. You may also want to use the cash to invest in assets other than real estate for diversification, to boost a college tuition fund, or to pad your retirement account.
To be sure, buying mortgage points may not be the best choice for everyone. Weigh your options and see if it's the best move for you.
For more advice to help you make smart financial decisions, check out CNBC's Financial Advisor Hub and Personal Finance section. | |
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