April 20th, 2021 5:31 PM by Jackie A. Graves, President
As mortgage rates have climbed from their historic lows, more borrowers are turning to a tried-and-true strategy to lock in super-low rates: They’re paying points.
Mortgage points are fees a buyer pays a mortgage lender to reduce the interest rate on the loan. The popularity of points dwindled last year — as rates plunged to jaw-droppingly low levels, fewer borrowers saw the need to buy down rates.
As rates have risen, more borrowers are paying points, according to mortgage data firm Black Knight. In December, as rates plummeted, the share of borrowers paying points fell to 49 percent, the lowest in recent memory. By March, fully 58 percent of borrowers paid points, Black Knight says.
So it appears that borrowers are pining for the super-low rates of months past — and more are willing to pay points.
“We’ve all become very enamored of having interest rates below 3 percent,” says Melissa Cohn, executive mortgage banker at William Raveis Mortgage. “You can’t get a 30-year fixed at 2.75 percent with no points — but you can pay points and get there.”
How mortgage points work
Each point the borrower buys costs 1 percent of the mortgage amount. So, one point on a $300,000 mortgage would cost $3,000. Each point typically lowers the rate by 0.25 percentage point, so one point would lower a mortgage rate of 3.5 percent to 3.25 percent for the life of the loan.
Not everyone is a fan of the concept. Steve Nakash, managing partner at Cherry Creek Mortgage, says borrowers should look to shorter loan terms, such as 15- or 20-year mortgages, rather than buying down the rate on a 30-year loan.
“It makes sense not to pay points,” Nakash says. “Consumers understand that a lower rate and cutting their term to 15 or 20 years creates so much more value. Charging points up front is really not a thing anymore. It’s going away pretty fast.”
But Cohn isn’t so quick to dismiss points. She acknowledges that only a fraction of borrowers pay points, but she says some like the trade-off of paying now for a lower rate over time.
“Points are still tax-deductible. If you want a lower rate and a tax deduction, paying points is not such a bad idea,” Cohn says. “You get the instant gratification of the tax deduction this year, and then you get the ongoing benefit of the lower payment in years to come.”
Should you pay points?
Deciding whether to pay points means running some numbers. You’ll want to check with your tax advisor about any tax benefits from paying points.
More importantly, you want to determine whether you’ll save enough through lower payments to recoup the upfront cost of the points.
In the example of a $300,000 loan at 3.5 percent, your monthly payment would be $1,347. If you paid $3,000 to lower the rate to 3.25 percent, your monthly payment dips to $1,306. In that case, it would take more than six years to recoup the $3,000 — so probably not a great deal.
“Buying down the rate will often take six years to earn back the cost of those points, so bear that in mind — especially if you’re tight for cash and unable to roll your points into the loan balance,” says Greg McBride, Bankrate’s chief financial analyst. ” The more years you have of making the lower payments the points bought you, the more you come out ahead.”
Brian Smith, regional manager and mortgage advisor at Union Home Mortgage, is similarly cautious about points. Many borrowers refinance every five years or so, and a refi ends the benefit of the points you paid.
“It can make a lot of sense if the customer is going to have the property for greater than 10 years, and there is a big difference in the rate,” Smith says. “My thing is: Can you recapture the investment in points in three years? If you can’t recoup the investment for five years or longer, I advise against paying points.”
Another factor to consider is how points affect your overall creditworthiness. If you’re already pushing the bounds of your borrowing limit, adding points to the equation might not be feasible.
“Rolling points and costs into your loan balance is the preferred way to go but be mindful of pushing your loan-to-value ratio above a threshold that triggers a higher rate,” McBride says. “This would negate some of the benefit of buying points.”
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