Should You Buy Mortgage (DISCOUNT) Points?

One of the most commonly referred to aspects of obtaining a mortgage is the all-important issue of "points." If you're in the market for a new home, or if you're looking to purchase for the first time, you've undoubtedly heard of them before, although you may have no idea what it means, or what "points" even refers to.

Let's start at the very beginning.  When you hear someone talking about mortgage points, they are speaking in reference to "discount points." In the most basic sense, one point is equal to one percent of the amount you are planning to borrow. So for example, if you were getting a loan for $150,000, then one point would be equal to $1,500.

After that is when it gets tricky, so pay attention. When you purchase points, you are basically making the decision to prepay part of your mortgage interest.  If that doesn't make sense, look at it this way.  For every point you buy, your lender will offer you a lower interest rate. The actual amount your interest rate will drop can vary, but in most cases its is approximately 1/4 of a percentage point per every discount point you purchased.  Whew.

Here's an example if you're still confused.  Let's say you are borrowing $100,000.  To drop your interest rate by half a percentage point you would need to spend $2000.  In most cases, a lender will let you purchase as many as 4 discount points (if you are so inclined).

But let's not jump the gun here.  You need to take a few things into consideration before you go to your lender trying to buy as many discount points as possible.

First of all (and just like everything else in this world) the main thing to think about when buying discount points is CAN YOU AFFORD IT? A lot of people (especially first time homebuyers) are pretty strapped for cash when they decide to purchase a new home, and having an extra 5 or 6 thousand dollars laying around for points just isn't reality.

In fact, even if you had that money laying around, you have to wonder if it would help you out more to spend it elsewhere, such as on home improvements or moving expenses.  You might even yield a higher return from your money if you put it into the stock market or purchased bonds.

Another major issue to consider has to do with how long you plan on living in the house you just purchased (or refinanced). Since buying these points is really just prepaying part of your interest upfront, it might take several years before the money you are saving exceeds the amount you paid upfront for the discount. Obviously, the longer you plan on living at the property, the better deal (and the more money you end up saving) over the life of your loan!

So the key to finding out if buying points is worth it is to calculate the breakeven point, which is when the amount you save each month catches up to the amount you spent on the discount points.  If you move out before this point is reached, the bank ends up winning, and vice versa.

In most cases the breakeven point is reached anywhere between 4 and 6 years after the loan is originated, depending on your interest rate and the amount you paid in points. A quality loan officer should be able to break down the numbers for you and show when the breakeven point is obtainable.

As always, if you have any questions about purchasing discounts points (or anything mortgage related) don't hesitate to CONTACT US and we will get back to you asap!

- Pate