Everything You Need to Know About Mortgage Points, Bad Credit Mortgages Included

If you’ve recently been shopping around for a mortgage, you might be familiar with the term “mortgage points.” Basically, it’s a way for banks and other lending institutions to make money through a different type of loan fee. Sometimes the banks call them “discount points.” In essence, a mortgage holder pays these mortgage or discount points in order to “buy” a lower interest rate on the mortgage itself. This is sometimes called “buying down” the rate of interest. In most cases, one point equals 1% of the mortgage amount but this sometime changes depending on the kind of loan - a bad credit mortgage for example.. So, if you have a $400,000 mortgage and you purchase two mortgage points, you can expect savings of 2%, or $8,000.

At first glance this seems like a pretty good option, but it isn’t always the best decision. This article talks about the advantages and disadvantages of mortgage points, so that you can make an educated decision for your personal finance. Assuming you are applying for a bad credit mortgage your expenses are already going to be higher than expected so it is a wise choice to consider any option that allows you to pay less for your mortgage.

Many factors influence whether mortgage points are a good idea for your particular situation. The most important is your anticipated future cash flow. When you purchase points, you’re paying more up-front with the expectation of saving money in the future because future monthly premiums will be calculated at a lower rate. As you can see, this is more beneficial if you plan to stay in your home for a long period of time. If you end up selling the property shortly after purchasing the points, you’ll miss out on most of the benefits.

For instance, if you have a $250,000 30-year mortgage at 6%, you’ll pay $1,499 each month. But, if you have the option of paying $5,000 to buy points that will lower your interest rate to 5.5%, you’re now paying against a $255,000 mortgage (the points have been added to the original mortgage value), with premiums of $1,448 each month. Your net monthly savings are $51.

This may not seem like very much. Indeed, you’ll have to pay for 8 years before you make up the cost of the points. If you plan to have the mortgage for longer than 8 years, then it makes sense to buy the points. But if you plan to move before them, it isn’t a good option.
Of course, if you’re an investor, you know that you could put the $5,000 into a solid investment and use it to pay $51 in monthly mortgage premiums for far more than eight years.

But let’s keep the calculations simple, in recognition of life’s unpredictability. If you think you’ll have the mortgage for at least eight years, go ahead and buy the mortgage points.

Some people find that they can make mortgage points work better for them if they make an offer that includes the home seller paying for closing costs and mortgage points but again, with a bad credit mortgage this might option might not be available. A good real estate agent can help you figure out the details, but in many cases it works out to the buyer’s advantage.