Mortgage points: Are they worth the investment?

If the term mortgage points and navigating the home-buying process confuse you, you’re not alone. Adding to the complexity, in August 2023, interest rates hit a 23-year high, making homeownership more expensive and out of reach for many.  

Now the average rate on a 30-year fixed mortgage is above 7%, but buying mortgage points could potentially save you thousands of dollars over the life of your loan.  

Below is a comprehensive guide detailing the pros and cons to help you make an informed decision. 

What are mortgage points? 

Mortgage points, also known as discount points, are fees paid directly to the lender at closing in exchange for a reduced interest rate. Essentially, you're prepaying some of the interest upfront to secure a lower rate over the term of your loan. 

The math behind mortgage points 

Let's break down the numbers. One mortgage point typically equals 1% of your loan amount. So, if you're taking out a $300,000 mortgage, one point would cost you $3,000. The reduction in interest rate varies but is often around 0.25%. 

Example: 

Without points: $300,000 30-year fixed loan at 7% interest 

With points: $300,000 loan at 6.75% interest after purchasing one point for $3,000 

Pros 

Lower monthly payments. The most obvious benefit is the reduction in your monthly mortgage payments. Over time, this can add up to significant savings. 

Tax deductions. In some cases, mortgage points can be tax-deductible, although this benefit has been reduced in recent years due to changes in tax laws. 

Cons 

Upfront costs. The immediate downside is the upfront cost. Not everyone has the extra cash to pay for a 20% down payment plus points at closing. Investing the funds elsewhere could be the better option. 

Time to break even. It takes time to recoup the cost of buying points. If you plan to sell or refinance your home in a few years, you may not break even from the cost of buying points. In this case, it’s a better idea to forgo buying points. 

How to determine your break-even point? 

Figuring this out is a huge factor. To do so, take the amount you would pay in points and divide it by the amount you would save on a monthly basis.  

 $3,000/$60 = 50 

In this instance, the total 50 is your break-even point — the number of months until you’ve saved what you paid upfront in points. If you plan to move out of the home or refinance it before the break-even point, then you may want to reconsider buying points.  

When are mortgage points worth it? 

Mortgage points are generally worth the investment if: 

• You have the cash to pay for a 20% down payment  

• You plan on staying in the home long enough to recoup the cost 

• Current interest rates are high and you want to lock in a lower rate 

To use the mortgage calculator from Bankrate, click here. 

This content is for informational purposes only and should not be construed as financial advice. The views, thoughts and opinions expressed in this paid post belong solely to the advertiser and do not represent the views of Brand Ave. Studios or its parent company.