mortgage

How do I: Decide if a lower rate is worth more points?

Topic: MORTGAGE
Who is affected: CONSUMERS AT EVERY STAGE OF LIFE
DEGREE OF DIFFICULTY: MODERATE
What you'll need: HOME PRICE; ESTIMATED TIME YOU'LL REMAIN IN HOME

What you need to know

It can be tough to decide whether it's worth it to buy more points to get a lower interest rate. Here are a few questions to make the decision easier:
  • How long do I plan to stay in the house? These days, few people stick around in the same house long enough to pay off their mortgage. If you are planning on moving in a few years or have a family that could be growing, buying points may not make sense.
  • How much will I really save?  Even if you do stay in a house long enough to realize savings from paying points, you may not save as much as you think. On a $200,000 mortgage, the difference in the monthly payment between an interest rate of 6.5 percent and 6 percent is only $65.04 a month. If you pay $4,000 for those 2 points (about what a half-point rate cut costs), it will take you about five years to break even (excluding tax benefits). You may decide that money could get a better return elsewhere.
  • How much are you putting down? If the answer is less than 20 percent, you'll most likely get socked with private mortgage insurance, or PMI, which will likely outweigh the benefit of a slightly lower interest rate.
  • What's my tax picture? Mortgage points are tax-deductible. Depending on your tax situation, the benefits of points may outweigh the cost.
Step-by-step
This handy calculator can help you decide whether paying points is right for you.
Knowing the difference between discount points and origination points is key. Discount points allow you to buy down the interest rate on a loan and are tax-deductible. Origination points are fees charged by lenders and aren't deductible. Paying extra discount points can sometimes make sense, but never pay more origination points than necessary.

 

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
MORTGAGE & REAL ESTATE NEWSLETTER

Timely market news and advice for consumers ready to buy, sell or invest in real estate. Delivered weekly.

Blog

Judy Martel

Slow thaw in housing

March housing numbers reflect problems with costs, supply and demand.  ... Read more

advertisement
Partner Center
advertisement

Connect with us