Finance Articles

Are Mortgage Points Worth Buying?

If you have been looking around for a mortgage there is no doubt that you have heard the term "points" referenced a good many times. Points, when referring to a mortgage, is a common term familiar to most people. However, while most are familiar with the term, a great many still do not know what it means.

When discussing points, the conversation is usually referring to discount points applied to a mortgage. Each discount point will be equal to one percent of the amount borrowed. For example, on a $200,000 mortgage one point will equal $2,000.

When points are purchased and paid for, the borrower is basically prepaying a part of the mortgage interest. For every point payed for by the buyer the lender will lower the mortgage interest rate. The amount of this decrease varies, but typically is equal to about a quarter of a percentage point for each discount point purchased.

For example, should you be borrowing $200,000 and have purchased two points, the points would cost you $4,000, and your mortgage interest rate would drop by half a percentage point. The purchasing of points is a common practice, and the majority of lenders allow you to purchase up to three or four points.

Now before rushing out to grab all the discount mortgage points you can, take a moment to consider a couple of things.

First of all, do you have enough cash in addition to your down payment to afford the purchase of points? Could the cash be more beneficial to you used some other way? Don't forget the mortgage closing costs, another drain on your available cash. Will you need cash for moving expenses? Does the house you are considering need repair, or improvements? Do you need money for landscaping? These are just a few of the other considerations that will require a cash outlay. Perhaps, the money paid for purchasing points can be better used elsewhere.

Should the portion of your cash being considered for the purchase of mortgage points be better off used for investments? Take a moment to think about this. Should you buy three points on a $300,000 mortgage, with an interest rate of 6.25% it will cost you $9,000. If you invest this $9000. in stocks or bonds, you have a good chance of earning more than you would save by buying the discount points.

Another major consideration regarding the purchase of points is how long do you expect to live in the home. The longer you stay, the better the deal points offer, and the more money you will save. Planning to stay in the house for only a few years; forget about buying points. You won't be in the home long enough to really benefit.

When buying discount points, which again is simply prepaying part of your mortgage interest upfront, the lender will come out ahead for the early years of your mortgage term. However, as the years pass your monthly savings will exceed the amount you initially paid for the points and you will come out ahead.

When considering the purchase of points, it is important for you to calculate your break even point. Should you move again before reaching the break even point, the bank wins. Stay longer than the break even point, and you win.

The time necessary to reach your break even point will depend on your mortgage interest rate, and the amount paid for points. For most loans, this time period will be between five and six years. You can find online calculators to help figure this out, or you can ask your lender to break down the numbers and help you determine your break even point.

Carl DiNello is an Article Author, Researcher, and Wesbite Owner whose articles are featured on websites covering the Internets most popular topics.

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