How to Buy Mortgage Points
Buying mortgage points can lower your interest rate, but many homeowners wonder if the upfront investment is worth the additional cash. In some situations, buying mortgage points can save you money in the long run, but your savings will depend on your home's unique "break even" point. Understanding how to calculate this number will help you make the best decision and may even save you money.
Instructions
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Ask your lender how much mortgage points cost. Although each lender is different, as a general rule, purchasing one mortgage point will drop your interest rate by about one-fourth of a percent. For example, if you're purchasing a home that costs $150,000 and you purchase one mortgage point, the cost would be $1,500 and your rate would be reduced from 6.5 percent to 6.25 percent.
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Get a list of available options. Your lender should provide you a list of what mortgage point options are available. For example, can you buy down your rate three points or is there a cap on what you can purchase?
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Use a mortgage calculator. These calculators are available online (see Resources section) and allow you to quickly calculate your break even point. For example, based on your inputs, the calculator may determine that you need to be in your home longer than five years (which is your break even point) to make your investment worthwhile.
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Shop the competition. Since each mortgage lender offers different options for buying points, make sure to check out a few. If you have an excellent credit score, you may even be able to negotiate better pricing on points.
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Tips & Warnings
If you plan on moving after three years and calculations say you need to stay at least five, check out other options. For example, investing the cost of buying mortgage points in a certificate of deposit allows you to still earn money on your investment.
Talk with your tax advisor about deductions. The purchase of mortgage points may be tax deductible. However, these deductions are often spread over the course of several years, instead of a single lump sum deduction.
