October 13th, 2019 10:43 AM by Jackie A. Graves, President
Paying mortgage points to get a lower rate on a mortgage is almost always a losing
proposition. Most homeowners don’t keep their mortgages long enough to do more
than recoup the up-front cost of paying points. A point is 1% of your loan
amount. If you take out a $250,000 mortgage, 1 point equals $2,500.
In the mortgage world, there are two types of mortgage points:
Borrowers get a lower rate for paying discount mortgage points
because they’re prepaying a portion of the interest on their loan.
Indeed, discount points are tax-deductible, just like the interest you pay with
each monthly mortgage payment.
Anywhere from one-eighth to one-quarter of a percentage point
per discount point. A range like that makes it absolutely critical to compare
offers that include points to those that don’t and determine how much you’re
really saving by paying thousands of extra dollars up front.
Some banks and mortgage companies actually promote interest
rates in their advertising that are only available by
paying mortgage points. They hope you’ll be so wowed by a rate that looks like
it’s lower than competitors are charging that you won’t notice the additional
The key question you need to ask is: How long will it take me to
recoup what I spend on points through lower monthly mortgage payments?
Considering two typical 30-year fixed-rate mortgages quickly
shows how much paying a point will save (or cost) you on a $100,000 mortgage.
Total Payments Over 30 Years
4%, No points
3.875%, 1 point
Savings from paying points
If you pay 1 point, or $1,000, to get the 3.875% rate, you lower
your monthly payments by about $10 a month. (Our mortgage
calculator will determine the monthly payment for any amount or
interest rate.) That means it would take 100 monthly payments, or more than
eight years, to recoup the up-front cost of that point. You won’t really start
saving any money until then, and therein lies the problem.
Chances are, you won’t keep your loan much longer than that since
the typical homeowner pays off a loan in just over eight years, according to
data compiled by Bloomberg News. Selling or refinancing before the
break-even point means you’ll actually wind up paying extra interest on
If you’ve just bought your dream home and know you’ll keep your
low-interest mortgage until your kindergartner graduates from high school,
paying points may seem like a smart move. With interest rates remaining
historically low, chances are you won’t need to refinance to reduce your rate.
Others might be forced to refinance or sell before breaking even on point if
they face an unexpected life challenge like divorce, death of a spouse,
disability or a job loss or transfer.
That’s why Richard Bettencourt, a mortgage broker in Danvers,
Massachusetts, and former president of the Association of Mortgage
Professionals, says paying mortgage points typically isn’t a good financial
“The only way I see a point making sense is for that rarity of
the person who says, ‘I’m going to make all 360 payments (on a 30-year home
loan) and never move,'” he said.
What about having a home seller pay points to buy down your
rate? Isn’t that a good deal for a buyer?
“Do you want the seller to reduce your monthly payment by $20
for the next 30 years or give you $7,500 to refinish the kitchen now?”
Another way to look at mortgage points is to consider how much
cash you can afford to pay at the loan-closing table, says Mark Palim, vice
president of applied economic and housing research for Fannie Mae, a
government-owned company that buys mortgage debt.
“If you use up some of your savings toward prepaying your
interest, which makes your payment lower on a monthly basis, you have less
savings if the water heater breaks,” he pointed out. “Does it make sense to put
more of your savings into the transaction to lower the monthly mortgage payments?”
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