If you’re considering buying a home, you already know the hard truth: Home prices are insanely high. Combine those listing prices with mortgage rates around 7% and you might wonder if it’s even worth becoming a homeowner.

There are two ways to make the costs of buying a home more manageable: mortgage discount points or lender credits. Mortgage points and lender credits both allow you to tweak your interest rate and closing costs. You’ll just have to decide if you would rather pay more money upfront or more money over the life of the loan. 

Paying mortgage points means you’ll pay less over the term of your loan but more in upfront closing costs. Taking lender credits allows you to pay less at closing in exchange for a higher interest rate, which translates to a heftier loan cost.

Here’s what to know about how points and credits impact interest rates, monthly payments and the total cost of a loan.

Mortgage points or lender credits?

Mortgage points and lender credits aren’t free. But they could both save you money on your home loan.

If you buy mortgage points, also known as discount points, you can reduce the interest rate on your home loan by paying more on closing day. Generally, if you plan to own the home for a significant period of time, paying for mortgage points will result in long-term savings. 

Lender credits allow you to save money now in exchange for a higher mortgage interest rate. This option frees up cash flow, which can help you put down a larger down payment, set aside money for home improvements or simply build up your cash reserves. 

How do mortgage points work?

Mortgage discount points lower your interest rate in exchange for a fee. Points can be purchased at closing (the final stage of buying a home, marking the transfer of property ownership to the buyer), in a process called “buying down the rate.” 

One mortgage point typically lowers your interest rate by 0.25% and costs 1% of the mortgage amount. 

If you’re buying or refinancing a home with a $400,000 mortgage and an interest rate of 7%, one mortgage point would lower your interest rate to 6.75% but add up to an additional $4,000 in closing costs. By pinning down a lower interest rate, you’ll have a lower monthly payment and pay less in interest over the length of the loan term. 

Mortgage points have become increasingly popular as interest rates have soared over the last few years: According to research from Zillow, nearly 45% of homebuyers taking out conventional loans paid for mortgage points in 2022 to buy down their rates.

Lenders usually allow you to purchase multiple discount points but may limit how much you can buy down your rate. If you plan to buy discount points, look closely at your loan estimate and closing disclosure.

Pros and cons of mortgage points

Pros

  • Allows you to save money in interest over the life of the loan

  • Results in a lower monthly payment

  • Can reduce your tax bill, since mortgage points are tax-deductible

Cons

  • Requires a larger upfront cost, increasing your overall closing costs

  • May not be cost-effective if you own the home for only a few years

How do lender credits work?

Similar to mortgage points, lender credits allow you to adjust your interest rate and upfront costs. But instead of lowering your interest rate, they give you a higher rate in exchange for lower closing costs.

Lender credits are less standardized than mortgage points. The amount that a single lender credit will increase your interest rate and reduce your closing costs varies by mortgage lender. In some cases, you may be able to use lender credits to eliminate closing costs completely.

You’ll have higher monthly payments because you’re agreeing to a higher interest rate with lender credits. You can find information about your lender credits in your home loan estimate or closing disclosure.

Pros and cons of using lender credits

Pros

  • Reduces your closing costs

  • Can free money for a larger down payment, home repairs and more

  • Results in a larger annual tax deduction for your mortgage interest

Cons

  • Results in a higher interest rate and potentially more money paid in the long run

  • Results in a higher monthly payment, which will reduce money left over in your budget

  • Higher monthly payments could impact your debt-to-income ratio and make it more difficult to get approved for a loan

Choosing between mortgage points and lender credits

Both mortgage points and lender credits allow you to save money, but in different ways. Mortgage points are best for borrowers who plan to be in the home for a relatively long period of time, can afford heftier closing costs and who want to save money over the long term. Lender credits, on the other hand, are best for borrowers who prefer a lower upfront cost, potentially resulting in greater savings if you plan to own the home for a short time. 

In both cases, it’s important to consider your short-term and long-term financial goals. Which is more important: Having immediate increased liquidity now by using lender credits? Or getting long-term savings by paying points?

What is a break-even point?

If you’re wondering which will result in more long-term savings, the key is to find your break-even point.

The break-even point: Mortgage points 

When you’re buying points, the break-even point is how long you would have to own the home before the higher upfront cost pays off and you start saving money. 

Suppose you’re buying a home with a $400,000 mortgage and the lender has quoted you an interest rate of 7%. You’re wondering whether mortgage points would help you save money over the 30-year loan term.

No mortgage points1 mortgage point2 mortgage points
Loan principal$400,000$400,000$400,000
Interest rate7%6.75%6.50%
Upfront costs$0$4,000$8,000
Monthly payment$2,661$2,594$2,528
Break-even pointN/A5 years5 years
30-Year total P&I cost$958,216$934,296$910,381

Buying down your rate with both one and two mortgage points would allow you to break even and start saving after around five years. As long as you plan to own the home for at least that long, you’re likely to save money. 

The difference between buying down your rate by one mortgage point versus two is that when you buy two mortgage points — a difference of $4,000 today — you will wind up saving nearly $24,000 more over your entire 30-year mortgage.

The break-even point: Lender credits

In the case of lender credits, calling it a break-even point can feel a bit backward. You’ll save money in the early days of your repayment, so this point actually reflects when you start losing cash. Consider it an inversion of the way you look at a break-even date for discount points: If you stay in the home long enough, that higher rate will eventually erase your upfront savings.

Let’s look at a similar example using the same $400,000 mortgage and 7% interest rate and a 30-year home loan, but with lender credits instead of mortgage points.

No lender credits1 lender credit2 lender credits
Loan principal$400,000$400,000$400,000
Interest rate7%7.25%7.50%
Closing cost$8,000$4,000$0
Monthly payment$2,661$2,728$2,796
Break-even point/Negative territoryN/A5 years5 years
30-Year total P&I cost$958,216$982,984$1,007,716

In this scenario, lender credits have a similar break-even point as mortgage points. The difference is that in the case of mortgage points, you start saving after about five years. But in the case of lender credits, you stop saving after about five years. 

So, as long as you plan to own your home for less than the break-even period, lender credits might be cost-effective for you. 

Tips for using mortgage points or mortgage lender credits 

  • Shop around: Mortgage lenders may have different policies for points, rate reductions and credits, so be sure to ask multiple lenders for a thorough breakdown of your monthly payments and closing cost tab to find the best deal.
  • Look for closing cost assistance before asking for credits: If you’re a first-time homebuyer on a low-to-moderate income, you may be able to find assistance to cover some of your closing costs from a state or local housing authority. Ultimately, this may be a better move than locking in a higher mortgage rate.
  • Think about your realistic plans for the future: Mortgage points and lender credits both rely on a certain amount of time to translate to meaningful savings. Do the math based on how long you expect to be in the home to see if either move — paying more now versus paying more each month — makes financial sense.

The bottom line

Ultimately, deciding whether to use points or credits is a personal decision and will depend on your financial situation. You can discuss your options with your mortgage lender, who can explain how each option would affect your upfront costs and monthly mortgage payments. You can also consult a mortgage broker for a more unbiased opinion. 

 

Also, don’t be afraid to ask your real estate agent or attorney for advice. These professionals have been involved in plenty of transactions, and they may be able to share a perspective on what they would do if they were in your shoes.

FAQs

An online calculator can help you determine how mortgage points would impact your mortgage process and monthly payment. You can use CNET’s mortgage calculator to help you determine your mortgage payment and how much you’ll save during the time you plan to own the home.

 

Because lender credits aren’t as standardized, there aren’t many online tools to help. Your lender should estimate how much lender credits will increase your interest rate and decrease your closing costs so you can calculate the long-term effects.

Closing costs are separate from your down payment, and they include a long list of one-time fees for originating the loan, buying a new title insurance policy to protect yourself, covering the cost of real estate transfer taxes, recording the transfer of ownership and more.

 

Closing costs will likely add thousands of dollars to your home purchase, but the cost varies based on the location and the price of the property. Consider research from CoreLogic’s ClosingCorp: Closing costs in Missouri average just over $2,000, but they typically add up to more than $17,000 in Delaware.

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