Is Buying Points on a Mortgage Worth It?

How to decide if buying mortgage points is worth it

Mortgage points are only worth it if the numbers fit your situation. “Buying points makes sense if you plan to stay in the home long enough to recoup the upfront cost through monthly savings,” said Hector Amendola, president at Panorama Mortgage Group. “That said, if you expect to move or upsize within a few years, paying points may not make sense.”

Start by answering these questions to decide whether it makes financial sense:

• What are your primary financial goals for this mortgage? Some borrowers want the lowest possible monthly payment. Others want maximum long-term interest savings. And some people simply want a predictable payment. Your goal determines whether mortgage points support or conflict with what you’re looking for in a mortgage.
• How long do you expect to keep the loan or stay in the home? If you plan to sell or refinance your home within a few years, you likely won’t recoup the upfront cost of buying points. The typical break-even timeline for mortgage points is four to seven years, so you may want to think twice about buying points if you’re moving again soon.

• Do you have enough cash to cover points without jeopardizing other priorities? If buying points will leave you with less than three months’ expenses available, you may want to skip it. Even if points offer solid long-term savings, they’re typically around 1% of the home purchase price and paying for them could put your other financial goals at risk.
• What’s happening with mortgage rates? If mortgage rates are projected to decline in the next year or two, you may have a chance to refinance before you're able to fully take advantage of the points you paid originally. But if rates are stable or are expected to go up, buying down your rate now may save you money in the long run.

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Variables to consider before making a decision

Buying mortgage points doesn’t make financial sense for everyone. Even if you can afford them, they’re generally only worth considering if you’ll keep the mortgage long enough to benefit from the lower rate. That’s why you should know your break-even point, which is the point where your total monthly savings finally catch up to the upfront fee you paid. Once you hit that break-even moment, you come out ahead.

Here are the variables you’ll need to crunch the numbers and figure out whether your break-even timeline aligns with your expected time in the home.

• Loan amount
• Interest rate with and without points
• Number of points and cost
• Monthly payment difference
• Expected time in the home
• Available cash after closing

When buying mortgage points is worth it

Mortgage points aren’t a guaranteed way to save money, but here are a few situations where the math can work out in your favor.

Lower monthly payments

Lower monthly payments are typically the main reason homebuyers buy points. Here’s an example of how using mortgage points can make a $350,000 loan more manageable:

At 7%, your monthly principal-and-interest payment on a $350,000 loan is about $2,329. If you buy one point, which typically costs around $3,500, your rate could go down to 6.75%, and your payment falls to around $2,270. In other words, you save $59 a month.

If you buy two points, you’d pay around $7,000 upfront, but your rate could drop to 6.5%, and your payment dips to $2,212. By buying two mortgage points, you save around $117 a month.

If you stay in the home long enough, those monthly savings can more than outweigh the upfront cost.

They may be tax deductible

Mortgage points can be tax deductible, but the rules depend on the type of loan. For purchases, points are usually deductible in the year paid if you itemize and the loan is secured by your main home. On refinances, points are generally deducted over the loan term. No matter your situation, keep all paperwork, including your Closing Disclosure and Form 1098, since your tax preparer will need them.

Save money on interest

Another major reason people choose to pay for points is the long-term interest savings. For example, on a $350,000 loan, dropping the rate from 7% to 6.75% can trim thousands off your total mortgage over a 30-year period. Lowering it further to 6.5% can save you closer to $40,000 over the life of the loan.

When buying mortgage points isn’t worth it

Here are the most common reasons homebuyers should skip points altogether.

Investing would return more

If the money you’d use for points could earn a higher return in a high-yield savings account, an index fund or another investment, you’re better off keeping it invested. This way, you still preserve some liquidity, and your overall net gain could end up higher than the interest savings from buying down your mortgage rate.

It compromises other financial accounts

Mortgage points should never come at the expense of your financial stability. If buying points forces you to cut back on retirement contributions, delay paying off high-interest debt or ignore upcoming major expenses like tuition, medical bills or home repairs, it’s usually a sign to skip them.

In other words, if buying points will leave your checking or savings accounts uncomfortably low,  or if you find yourself dipping into money reserved for other priorities, don’t buy them.

You can’t afford it

Buying points adds thousands of dollars to your closing costs, and not everyone has the cash to comfortably cover it. Ideally, you’d want to have at least three months of living expenses in your emergency fund after closing. If paying for points would drain that cushion, you may want to skip them. A lower rate won’t help you much if you’re already financially struggling the moment you move into your home.

» MORE: How to negotiate closing costs

How to calculate break-even points for buying down mortgage rate

To calculate your break-even point, take the total cost of the points and divide it by how much they lower your monthly payment. If you spend $7,000 on points and your payment drops by $117 a month, your break-even point is around five years. Note that most borrowers land somewhere between four and seven years.

Once you pass that break-even point, every month of savings is money you get to keep. Over a full 30-year mortgage, that can easily add up to tens of thousands of dollars, depending on the loan size and how much the rate drops.

If you’ll keep the loan long-term and have the cash, buying down your rate can be one of the easiest ways to save thousands in interest. That said, if you won’t make it past the break-even point, it makes more financial sense to skip buying mortgage points.

How to buy mortgage points

If buying points makes financial sense for your situation, here’s how to do it correctly:

• Get written quotes. Get quotes for your rate with zero points, one point and two points so you can clearly compare the savings.
• Shop around. Shop around with at least three different lenders, since point pricing and rate reductions can vary depending on who you go to.
• Review your loan estimate. Read your loan estimate to confirm the point cost, interest rate and monthly payment are correct.
• Pay for the points at closing. The cost will be included in your total cash-to-close amount.
• Save your closing documents. Keep your closing documents, especially your Closing Disclosure and Form 1098, for tax purposes and future refinancing.