The mortgage market has been very volatile in 2022. Earlier last year, rates rose sharply, hitting 5.81% by mid-June. Since then, mortgage rates have fallen steadily, partly as a result of inflationary pressures and sluggish economic growth—and dipped below 5% following the first week of August. Since then, rates have been on the rise once again, with the 30-year fixed rate mortgage stalling around 6.5% as of February 2023.
With so much uncertainty, timing the market to lock in a lower interest rate may not be a wise course of action. Luckily, there are other ways to reduce the interest rate on your mortgage.
One of the most popular ways is to buy mortgage discount points. These are upfront fees paid to a lender at closing that reduce your interest rate by a predetermined amount for the lifetime of your loan.
Most lenders will have a cap on the number of points they’re willing to purchase from borrowers, and at Spartan Invest, we want to help you consider this option. Let’s take a closer look at how mortgage discount points work before we dive into this offer in detail.
What are mortgage discount points?
Mortgage discount points are a form of prepaid interest. Essentially, you pay the lender cash upfront and receive a lower interest rate and reduced monthly payments over the loan term. (The reverse is also true. Some lenders that offer no-closing-cost mortgages will lend at higher interest rates to compensate for the forgone fee income.)
Generally, one discount point is 1% of your mortgage loan amount. For example, if you take out a mortgage for $300,000, one discount point will cost you $3,000. For each mortgage discount point you buy, the lender reduces your interest rate by a set percentage point.
The discount point you receive varies by lender, but one discount point typically reduces your interest rate by 0.25%. For instance, If you buy one point on a 30-year fixed-rate mortgage at 5.22%, your interest rate will be lowered to 4.95%.
Should you buy points?
Mortgage discount points are a great way to save money on your mortgage in a high-interest rate environment. By buying points, you’re essentially pre-paying your interest in exchange for smaller monthly payments. This move can save you thousands of dollars over the life of your loan, especially if you intend to hold your home or investment property for many years.
Contact your Spartan Invest sales representative or get in touch with us online to connect and discuss your options.