Making the Mortgage Points Buying Decision

Whether mortgage points are a good idea, is a complicated matter, and depends on how long you plan to stay in your home.

Mortgage points are a type of discount that homebuyers can get before closing their loans. Each point costs around 1% of your mortgage, and it lowers your interest rate by approximately one-quarter of a percentage point, bringing  bringing a 3% interest rate to 2.75%. Every bank is different, but this is the norm. In most cases, points are tax-deductible, but there are restrictions.

The advantage is simple: purchasing points lowers your interest rate, hence it's often referred to as buying down the rate. However, whether it's a good idea isn't a no-brainer: It necessitates a calculation that compares the upfront price to the savings over the life of the loan in terms of interest rates. Purchasing a mortgage point on a $200,000 loan—which would cost about $2,000—can save around $10,000 over the life of a 30-year mortgage with an initial 4.5 percent interest rate, according to one example from Bank of America.

While it may appear to be a good option, you should think carefully before taking it: Mortgage rates are only now beginning to rebound from historical lows, so you might not feel obligated to eat into an already-low rate. While mortgage points can pay off, they rarely do so unless you're planning on staying put for a long time. In the BofA scenario, the break-even point, or the time it will take to repay the initial points investment, is 68 months. That means buying a point wouldn't make sense if you sell your home before 6 years have passed.

Banks love terms and conditions, as you are aware. While mortgage points may be used on fixed- and adjustable-rate mortgages, some lenders will not credit the points after the fixed period of the adjustable rate term.

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