Should you buy points on a mortgage to lower your interest rate?

Buying mortgage points is a way to pay upfront to lower the overall cost of your loan and reduce its monthly payment. It makes the most sense in a few cases:

If you plan to be in the home for a long period of time

Because buying points on mortgage loans reduces the rate for the life of the loan, every dollar you spend on points goes further the longer you pay that mortgage. As a result, if you plan to be in the house for a while, the amount you’ll save each month is likely to make the upfront cost worth it. (Conversely, if you don’t plan to stay in a home for a long time, paying points is likely to lose you money overall.)

 

You’re already putting 20 percent down

If you are, you’re avoiding private mortgage insurance (PMI) and likely getting the best interest rate the lender can offer you. If you haven’t hit the 20 percent mark on the down payment, though, putting money there rather than into points will likely still lower your interest rate, and possibly by a larger margin. That’s because bigger down payment lowers your loan to value ratio, or LTV, which is the size of your mortgage compared with the value of a home.

 

You don’t plan to refinance anytime soon

Even if you plan to stay in the house for a while, the current environment of relatively high interest rates may have you considering a refi down the road. Refinancing will change your mortgage interest rate, so if you think that could be in your future, it may be prudent to skip buying points mortgage-wise now.

 

Ultimately, borrowers should consider all the factors that could determine how long they plan to stay in the home with that mortgage — such as the size and location of the property, their job situation and the current mortgage rate environment — then figure out how long it would take them to break even before buying mortgage points.

 

Example: How mortgage points can cut interest costs

If you can afford to buy discount points on top of the down payment and closing costs, you will lower your monthly mortgage payments and could save lots of money. The key is staying in the home long enough to recoup the prepaid interest. As we mentioned before, if you sell the home after only a few years, or refinance the mortgage or pay it off, buying discount points could be a money-loser.

Compare loans with APR

Looking at the annual percentage rate (APR) of your mortgage can help you compare loans with different rate and point combinations. The APR incorporates not just the interest rate, but also the points you pay and any fees the lender will charge, so it can give you more clarity and let you more easily compare apples to apples.

You can decide whether to pay points on a mortgage based on whether this strategy makes sense for your specific situation. Once you get a quote from a lender, run the numbers to see if it’s worth paying points to lower the rate for the length of your loan.