Editor’s note: This question was sent in from a reader and was answered by two of our mortgage researchers. There is a “second response” label halfway through the article, to show where the second writer’s response begins.
Reader question: “I know a lot of borrowers use points to get a lower interest rate. I can see the logic behind that, but I’m trying to keep my up-front costs as low as possible when buying a home. Are there mortgages with no points assigned to them?”
Yes, there are mortgages available with no points added on to them. But you will probably have to pay a higher interest rate to take on such a loan. Points are basically interest that is paid on the front end of the process, instead of being spread over the term of the loan like “regular” interest.
Mortgage lenders make money in two ways, by charging interest and fees. They are going to charge interest one way or the other. But as a borrower, you have some options as to how you pay it.
Some people choose to pay points (which equal 1% of the loan amount) at closing, in order to get a lower interest rate on the loan. This strategy can help you save money over time if you keep the mortgage loan long enough to reach and exceed the “break even” point. That is when your long-term savings begin to exceed the extra amount paid at closing in the form of points. Make sense?
Here’s a basic overview of points you’ll find helpful, if you’re not familiar with the subject.
Mortgages With No Points = Higher Interest Rate
Some borrowers, such as yourself, prefer to keep their upfront costs as low as possible. So they are willing to forgo the points in exchange for taking a higher interest rate on the loan. With these borrowers, paying more in interest over a period of many years isn’t a very big deal, as long as they can minimize their closing costs. People with limited funds / savings usually fall into this category.
Mortgage origination fees are also sometimes expressed as points, or percentages of the loan amount. But here again, some lenders are willing to waive the origination fee when the borrower agrees to take on a higher rate. There is often a seesaw relationship between the amount you pay up front and the amount you pay over the long term in the form of interest. It’s a tradeoff. Fortunately, this relationship can be “tailored” in a way that serves your interests.
But the bottom line is yes, there are mortgages available with no points assigned to them. So when you are comparison shopping, and a lender offers you a certain interest rate on a loan, you need to find out if points are required to get that particular rate. You also need to find out the full cost of the loan, including the estimated closing costs. That’s why it is wise to compare offers based on annual percentage rate (APR) instead of the rate alone.
Yes, you can get a mortgage loan without paying discount points at closing. You’ll just end up with a higher rate, which means you could end up paying a lot more money in interest over time (depending on how long you keep the loan, before selling or refinancing).
Paying points only makes sense when you’re planning to stay in the home and keep the loan for many years, long enough to benefit from the lower interest rate. For a shorter stay, it might be best to skip the points and take a higher rate, to avoid the added up-front costs. You have to do the math to figure out what works best, based on your long-term plans.
My advice is to have the lender show you two different scenarios on paper — one with discount points paid at closing, and one without. You could even ask to see a financial breakdown of various scenarios, based on different amounts paid at closing. For instance, how much would half a point (0.5%) lower your mortgage rate, versus a whole point (1%)? And how long will it take to reach the break-even point in both of those scenarios. These are the questions you need to be asking.
You really have to look at this on paper to see what works best for you. It’s the lender’s job to show you different scenarios, and how they affect your up-front and long-term costs. The bottom line is that there are mortgages with no points on them. But it’s a tradeoff.