Mortgage Rates

April 19, 2024

Is It Worth It to Buy Points on a Mortgage?

Is It Worth It to Buy Points on a Mortgage? - United Home Loans

A discount point is an upfront cost, equivalent to a percentage of the loan amount, that lowers your mortgage interest rate. Many people will use closing cost savings tools (like a seller credit, lender contribution, or down payment assistance) to cover the cost of points. Let’s say none of these are available to you or you would rather use the assistance for something else. You’re facing a decision of whether or not to pay out of pocket to lower your interest rate. Is it worth it to buy points on a mortgage? 

Three Considerations for Points

There are three things to consider when asking yourself whether it is worth it to buy points on a mortgage. What the break even point is, how long you plan on staying in the home, and whether rates are trending downward. 

(1) Break Even Point 

A mortgage banker will help you figure out how many monthly payments you will need to make before the total of what you saved on interest every month matches the amount you paid for points. It’s important to figure this out in order to make a sound financial decision. While a lower monthly payment due to points may automatically signal “savings” in your head, you aren’t really saving right away, just enjoying room in the monthly budget because you paid more upfront. After the break even point, however, you’ll see genuine savings.  

(2) Years in the Home

Once your mortgage banker has shared the break even point with you, the next thing to think about is how long you’ll be staying in the home. If you are assured that the break even point will come after the number of years you’ll be staying in the home, then the answer to whether it is worth it to pay points on a mortgage is an automatic “no.” It’s nice to have a lower monthly payment for the time you are in the home, but the money you spent on points is more valuable if it is saved or put toward the principal balance. On the other hand, when you can reasonably assume that you’ll be in the home long after the break even point, the money you spent on points not only returns to you but multiplies. 

(3) Interest Rate Trends

While basing your decision of whether to buy points on the market is a little tricky, there are some instances in which you can make a confident decision. When all signs point to interest rates dropping significantly within the next 1-2 years, there are better options than points. 

First, you and your realtor can negotiate a 2/1 Buydown from the seller. This is a seller-paid mortgage solution that lowers your interest rate by 2% the first year and 1% the second. At or before the third year, you would refinance to a permanently lower rate if that is where the market ends up. 

Second, you can always plan to refinance later, once rates drop. This suggestion comes with a caveat, though. Make sure you are entirely comfortable with the monthly payment at today’s rate, as if you didn’t have the option to change it. No one can ever say for sure what interest rates will do nor what financial situation may crop up and prevent you from qualifying for a refinance. That said, it’s hard not to keep in the back of your mind that there is potential to lower your rate through a refinance. 

These two options assume that interest rates are predicted to change so drastically that they will be lower than the already-lowered rate you would’ve achieved by buying points. Because small and mid-sized movements in rates are unpredictable, it’s important to consult with your mortgage banker and financial advisor on whether large-scale trends are strongly pointing toward an eventual market interest rate that would make buying points worth it or not.  

When Is It Worth It to Buy Points on a Mortgage? 

Now that you know the three considerations, it’s time to put it together to describe a situation that would make the answer to “Is it worth it to buy points on a mortgage” a yes. 

In times of shorter break even points, points are a great idea. When the market rate is hovering between 6.5-7.00%, for example, your break even point could be as little as less than two years. (This, compared to when rates were in the 3%’s during the pandemic and break even points were well over 10 years). People rarely buy a home and plan to live in it less than two years, so that answers the question of whether the time spent in the home is conducive to points. And if rates ultimately end up drastically lower, say, three to four years later or more, there will still have been time spent saving money before considering a refinance. 

Case by Case Basis

What we have described in this article are rules of thumb. When it comes to mortgages though, every borrower’s financial situation is unique. There may be other reasons to buy points, additional considerations, or instances in which one of the three considerations should be put aside. That is why you will want to have a thorough conversation with a mortgage banker before making the final decision on whether or not to buy points on a mortgage. 

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