Introduction
When it comes to securing a mortgage, one of the decisions you may face is whether or not to buy discount points, also known as mortgage points. These are upfront fees paid to the lender in exchange for a lower interest rate over the life of the loan. But what if you've already closed on your mortgage and didn't purchase points initially? Can you still buy mortgage points later?
The short answer is yes, you can potentially buy mortgage points after closing on your home loan, but it's not as straightforward as doing so during the initial mortgage process. In this article, we'll explore the ins and outs of buying mortgage points later, the potential benefits and drawbacks, and what you need to consider before making this decision.
Understanding Mortgage Points
Before we dive into the specifics of buying points later, let's quickly review what mortgage points are and how they work.
Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a lower interest rate on your mortgage. Each point typically costs 1% of the total loan amount and can lower your interest rate by a certain percentage, usually around 0.25%.
For example, if you're taking out a $300,000 mortgage, one point would cost $3,000 (1% of $300,000). If the lender offers a 0.25% interest rate reduction for each point, paying one point could lower your interest rate from, say, 5% to 4.75%.
The decision to buy mortgage points at closing often comes down to how long you plan to stay in the home and the potential savings over the life of the loan.
Can You Really Buy Mortgage Points Later?
Now, let's address the main question: can you buy mortgage points after closing on your home loan? The short answer is yes, but it's not as simple as paying the points upfront during the initial mortgage process.
When you buy mortgage points later, you're essentially refinancing your existing mortgage to a new loan with a lower interest rate in exchange for paying those points. This process is known as a "rate and term refinance," and it involves going through the entire mortgage application and underwriting process again, just as you did when you first got your home loan.
Potential Benefits of Buying Mortgage Points Later
Despite the additional effort and costs involved in refinancing, there are potential benefits to buying mortgage points later:
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Lower Interest Rate: The primary benefit of buying mortgage points, whether upfront or later, is securing a lower interest rate for the remaining term of your loan. This can result in significant savings over the life of the mortgage, especially if you plan to stay in your home for many years.
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Flexibility: If you didn't have the upfront funds to buy points during the initial mortgage process, buying them later allows you to take advantage of the potential savings when you're in a better financial position.
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Changing Circumstances: Your financial situation or plans for the home may have changed since you first got your mortgage. Buying points later can make sense if you now plan to stay in the home longer than you initially anticipated.
Potential Drawbacks of Buying Mortgage Points Later
While buying mortgage points later can be advantageous in certain situations, it's important to consider the potential drawbacks as well:
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Refinancing Costs: Refinancing your mortgage comes with various fees and closing costs, such as appraisal fees, credit report fees, and lender fees. These costs can offset some of the potential savings from buying mortgage points, so you'll need to carefully evaluate the break-even point.
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Credit and Income Qualifications: Just like when you first obtained your mortgage, you'll need to meet the lender's credit score and income requirements when refinancing. If your financial situation has changed significantly, you may not qualify for the best rates or terms.
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Resetting the Loan Term: When you refinance, your loan term essentially resets, meaning you'll have to start over with a new 15-year or 30-year term (unless you choose a different term). This can potentially increase the total interest paid over the life of the loan, even with a lower interest rate.
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Market Conditions: Interest rates and lender policies can change over time, affecting the availability and terms of mortgage points when you decide to refinance.
Factors to Consider Before Buying Mortgage Points Later
If you're considering buying mortgage points later through a rate and term refinance, here are some key factors to consider:
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Break-Even Point: Calculate the break-even point to determine how long it will take for the savings from the lower interest rate to offset the upfront costs of buying points and refinancing. This will help you decide if it's worth it based on your plans for the home.
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Current Interest Rates: Monitor current mortgage rates and compare them to your existing rate. If rates have increased significantly since you got your initial mortgage, buying points may not make as much financial sense.
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Remaining Loan Term: Consider how many years are left on your current mortgage term. The longer the remaining term, the more potential savings you can realize by buying points and securing a lower interest rate.
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Financial Situation: Evaluate your current financial situation, including your credit score, income, and available funds for closing costs and points. Ensure that you meet the lender's requirements and have the necessary funds to make the refinance worthwhile.
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Long-Term Plans: Think about your long-term plans for the home. If you plan to sell or move within a few years, the savings from buying points may not outweigh the upfront costs.
Conclusion
In conclusion, while it is possible to buy mortgage points after closing on your home loan through a rate and term refinance, it's a decision that requires careful consideration and analysis. Weigh the potential savings against the upfront costs and your long-term plans for the home to determine if buying points later makes financial sense for your situation.
Remember, buying mortgage points is not a one-size-fits-all solution, and the decision should be based on your unique circumstances and goals. If you're unsure whether buying points later is the right move, it's always a good idea to consult with a financial advisor or mortgage professional who can guide you through the process and help you make an informed decision.