Buying Mortgage Points

Ever thought about buying mortgage points when you go to your lender to buy a home? You should. Buying mortgage points is a fantastic and easy way to reduce the total amount of interest paid to the bank over the life of a home loan. I have been involved in more than one deal where the buyer has purchased points, and does not regret it later. Among other things, buying mortgage points offers the following benefits:

  • Points are tax deductible.
    This has to be done on a depreciation schedule, but nonetheless, it is another item you can add to your itemization schedule for your taxes. This is above and beyond the deduction that you get for mortgage interest every year.
  • Points cut down the interest rate you pay on a loan.
    In the deal I have done, it seems that buying one point is about the equivalent of reducing your interest rate by about 1/4 of a percent. Thus, if you are quoted a rate of 6.5%, you would be buying it down to 6.25%. The banks have a formula on how they come up with the percentage equivalent of the point bought, so it vary depending on your lender.
  • Often, points can be financed.
    In other words, if you were to buy a point on a $100,000 loan, you can roll the cost of the point back into the loan, thereby increasing your loan amount to $101,000. I will explain in more detail in a moment.

Buying Mortgage Points Example

Now that I have covered some of the benefits of buying mortgage points, I would like to go through an example so you can see how this works in the real world. Let’s look at a $100,000 loan amount with two points (often banks will limit you to only 2 points – I guess because they will lose too much money if you buy more 🙂 ).

$100,000 * .02 = $2,000

Each “point” is priced at 1% of the loan amount. So in this case, it will cost you $2,000 to buy two points. So let’s see how that will affect your mortgage payment. Let’s say that you were approved for a 6.5% loan and the bank took 1/4 of a percent off the interest rate for each point.

PMT on $100,000 at 6.5% = $632.07 (Principle and interest only, based on a 30 year loan)

PMT on $100,000 at 6% = $599.55 (Again, principle and interest only, based on a 30 year loan)

So that is a difference of $32.52 per month, which is $11,707.20 over the life of the loan. Neat huh?

But what if you don’t have an extra $2,000 at closing to be able to pay for these points. Well, as I mentioned before, ask your lender about financing the points as well. If they did, here is what the principle and interest payments would like for the same 30 year loan amounts.

PMT on $100,000 at 6.5% = $632.07

PMT on $102,000 (adding in the $2,000 for buying 2 mortgage points) at 6% = $611.54

That is a difference of $20.53 per month, which is $7,390.80 over the life of the loan. Now you tell me, you spend no extra money at closing, and yet you still save $7,390.80 over the life of loan, would you do this? It seems like a no brainer to me.

This is the power and benefit you get when you buy mortgage points. I have worked on loans where we have done this, and it works. Be sure to read my follow up to buying mortgage points. Please leave any feedback or questions you have below.

8 thoughts on “Buying Mortgage Points

  1. I don’t think this is a no brainer. What about the opportunity cost of paying that money up front? You could invest that $2,000 and earn 8% interest you’ll have over $20,000 before inflation.

  2. In the second example, when I said it was a no brainer, notice that I was referring to when you finance the cost of the points into the loan. The loan amount increases, but you still save money in interest charges. No extra money is spent out of pocket.

    If you are referring to the first example, then yes, you have to decide if you want to spend the $2,000 up front or not.

  3. Why would you finance points? That is retarded and cutting down your “savings” on the interest rate. Not to mention that if you sell your property before the typical 5-7 years it takes for the point to pay for itself in savings, then you just added a few thousand to your loan for no reason. Loosing additional equity you could have had. Everyone should do the complete math equation to decide if paying points is right for them. Its not always a no-brainer!

  4. Pingback: Buying Mortgage Points Follow Up

  5. SARAHR:

    I am not sure how to answer your comment. I thought I presented clear and indisputable evidence in my example of how financing 2 points can save you money. In the $100,000 ($102,000 adding the points in) example, the savings were $20.53 per month. You tell me – no money out of pocket and $20.53 saved per month, is this a good move or a bad move?

    The only way I see it being a bad move is if you plan to sell the property very soon after purchasing. Most people don’t plan to do this, and if you know enough to flip a house, then you should already know about buying points.

  6. JB,
    Do you ever put more than the absolute minimum down payment that your lender will let you get away with? If so, why? Why not invest it all eslewhere and enjoy all the extra money you will make. The bottom line is that people do drop 20+ percent on their loan sometimes, and buying points could be a very feasible alternative that saves money in the long run.

  7. Buying Mortgage Points Example is incorrect. What about the interest you will be paying over the life of the loan for the additional amount fianced??

    • Dave:

      There are 2 examples shown. The first one shows the difference in payments/interest if the buyer pays for the points in cash at the closing table. The second one includes rolling the points into the mortgage.

      So the examples are correct!

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