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?
What are mortgage points?
Points are basically pre-paid interest. That’s pretty much it.
Why would you buy mortgage points?
You pre-pay your interest to save money in the long run.
How do mortgage points work?
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 eighth of a point. It’s not any more complicated than that.
When should you buy mortgage points?
The pros of doing this are easily understandable. 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 have to 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.
It really makes the most sense to buy points if you don’t plan on moving for several years. And don’t forget, 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 from you taxes.
Do your homework and figure out if buying points makes sense
As you can see, it doesn’t take a mathematics degree to figure out if points make good financial sense for you. Just some simple math based on how much you will pay for your home or refinance and how long you plan on staying in the home. Just do your homework and you’ll get an “A” on your buying mortgage points exam!