Does paying points to lower your Mortgage/Loan rate make sense?

Photo by Precondo CA on Unsplash

Author: Andrew Lee
About 2 minutes read

Maybe you heard of points (a.k.a. Discount Points, Mortgage Points) when applying for a conventional loan on a house or a property. Generally speaking, when you Buy Points, you are buying down the mortgage interest  rate/loan rate. But have you ever looked into "points" and what does it really mean besides of buying down the loan rate? I hope this article can provide some value and insights for your due-diligence and do some calculations whether it makes sense for your situation.

When it comes to buying points, you can request your lender (for conventional loan) to provide a list or comparison so you know how much you are paying to buy down points and how long to break-even since you are paying an amount upfront to lower your loan rate. It will take awhile on your monthly savings to cover this upfront cost.

The following example uses a loan amount of $600,000 with a 30 years fixed 3.5% loan rate as an example, "no points" versus "points". As you can see, the interest rate is lower, hence, the monthly amortized payment is $204.92 lower then "no-points", and it takes about 37 months (~3 years) to cover the point cost of $7,590. However, for a fully amortized loan like this, you will also notice that the total interest paid  for the loan is also lower.

You may also be thinking that what if I don't pay the points, and use the point's cost $7,590 as an additional payment to lower your loan amount upfront? Here is a comparison for you with $600,000 - $7,590 = $592,410 as the new loan amount with the same 3.5% loan rate and 30 years term.

As you can see, monthly payment difference is ~$34 and the 30 years total interest paid difference is ~$4,680.

Here is the Google sheet I created if you are interested or want to learn how I did it.

Whether you want to pay points or not depends on your situation. Paying points will take some time to breakeven, so if you plan to refinance or sell the property within 3- 5 years, you want to calculate or request this information from your lender as part of your due-diligence.

Lower monthly payment also means lower debt-to-income ratio. This could impact your future finances or other situations that consider mortgage as liability. Since you also keep more in your pocket, this also means you have an opportunity to utilize this additional savings.

Financial expenses to purchase an investment property like points, origination fees, broker fees, etc. could also contribute to your cost basis for the property, in other word, you have some tax benefits when selling your property since it could lower the taxable gain.

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References

https://bettermoneyhabits.bankofamerica.com/en/home-ownership/buying-mortgage-points-lower-rate