Mortgage Rates Are Sky-High. Is It Worth Buying Points to Lower Your Rate?

Signing a mortgage has become a really expensive prospect. The average 30-year mortgage rate is now a whopping 7.76%, according to Freddie Mac. Compared to the rates mortgage lenders were giving out in 2020 and 2021, today's borrowing rates are, in the eyes of a lot of people, ridiculously high -- though interestingly enough, they're not nearly as high as the rates lenders were charging back in the late 1970s and early 1980s.

But even though 7.76% may not be the highest the 30-year mortgage rate has ever been, you may be eager to do what you can to lower the interest rate on your home loan. One option, of course, is to take out a 15-year mortgage. Freddie Mac says that the average 15-year mortgage rate today is 7.03%. But that could result in a higher monthly payment that's just not affordable for you.

Another option you can look at is buying points on your mortgage. This will allow you to permanently lower the interest rate on your home loan. And it's a strategy that could make sense given today's soaring rates -- but only under the right circumstances.

How mortgage points work

Technically, mortgage lenders can assign their own benefit and cost to mortgage points. But generally, a single mortgage point costs 1% of the loan amount you're taking out. And a single mortgage point will usually result in a 0.25% reduction in your loan's interest rate.

So let's say you're signing a $200,000 mortgage. One point would cost you $2,000. If you'd normally qualify for an interest rate of 7.76%, you'd instead potentially be looking at a rate of 7.51%.

Is it worth it to buy mortgage points?

It could make sense to buy mortgage points today if you plan to stay in your home for a long time. But if you're buying a starter home, you may not end up staying in your home long enough to make up for that initial outlay.

Let's say that instead of signing a $200,000 mortgage at 7.76%, you spend $2,000 to shave your rate down to 7.51%. Instead of a monthly payment of $1,435 for principal and interest, you'll have a monthly payment of $1,400.

It will take you 58 months to come out ahead financially in this situation because you'll have spent $2,000 to save $35 a month. If you plan to stay in your home for well more than five years, then clearly, that $2,000 investment is a good one.

However, if you're buying a starter home, you may only end up being in that home for four years, or 48 months. So in that case, you'll lose out financially by handing over $2,000 to only save $35 a month for four years. That's just $1,680 in savings.

At a time when mortgages are so expensive to sign, buying points is an option worth looking into. Just make sure to run the numbers and think carefully about your long-term plans before making that decision.