Mortgage Points: Why Pay For Them?

If you are in the market for a home or considering refinancing your current mortgage, you probably have heard your mortgage professional talking about points. They may advise you to buy points or they may advise you not to, depending on your situation. The question is, do you really understand points and when it makes sense to buy points?

A point is 1% of the loan amount. So, one point on a $100,000 mortgage costs $1,000. Points can be purchased in increments down to an eight of a point. It’s not any more complicated than that. When should you buy mortgage points?

The pros of doing this are really pretty easy to understand. By pre-paying your interest, you get a lower rate and therefore a lower payment for the life of your loan. The cons of buying points are that you must stay in the home for a certain period before you "break even" on the transaction.

For example, if you have a $200,000 mortgage and you buy two points, you will pay $4,000 for those points at closing. If buying the points lowers your payment $250 a month, you’ll need to stay in your house at least 16 months to break even (16 × 250 = 4000). In this example, after 16 months you’ll start making money. After several years, you’ll save a lot of money.

One other thing to keep in mind about buying points up front: Points may be tax deductible, so there is an added benefit if you qualify for the tax deduction. Check with your tax advisor before you deduct points on your taxes.

If you have any questions or comments about points, just click the comment link below and sound off. We’ll get back to you with answers to any questions you might have. We’d love to hear from you.