How Points Affect Your Mortgage

Your mortgage payment is usually the largest reacquiring payment that you must make each month. If you're like most people, you want to reduce how much you have to pay without reducing how much house you can buy. You can reduce both your monthly payment and how much you spend on your entire loan by buying points against your loan. What are points and how can you use them to your advantage? Keep reading to learn more about how points affect your home loan.

What Are Mortgage Points?

Mortgage points are a fee that is equal to 1 percent of your overall loan value. Each point will lower the interest rate of your loan. For example, one point for a $250,000 loan will cost you $2,500 at the time of closing. The bank will lower your interest rate by 0.25 percent for every point you buy. On a $250,000 loan with a 6 percent interest rate, you would need $5,000 to buy two points. With this purchase, the bank would reduce the 6 percent interest rate to 5.5 percent.

A conventional mortgage will typically have an option where you can buy zero to four points. Lowering your payments and paying less for your house overall may seem like a no brainer, but buying points may not be the best decision for you.

The Pros of Buying Mortgage Points

• Saving Money – Buying two points on your $250,000 loan at 6 percent can save you $79.40 per month on a 30-year fixed-rate loan. This is a savings of $28,585 over the course of your loan. If you were to buy four points, you would save $56,456. This number is slightly skewed because you do have to pay for the points. When you take that cost back out, you still save $23,585 and $46,456, respectively.



• Tax Deductions – You may be able to deduct the cost of buying mortgage points from your income tax. As long as the points are not a method for paying closing costs or other fees, such as notary fees, home appraisal costs or home inspection costs, you should be able to deduct the expense from that year's income tax. However, tax laws are always changing, so consult with your tax advisor before acquiring a loan.


• Mortgage Affordability – Lenders base the amount you can borrow to buy a home in part on your debt to equity ratio. This ratio compares how much debt you pay each month to the amount of income you make each month. The more money you make, the more you can borrow. If you want a specific house but the monthly payments are too high for you to get a loan, buying points may lower your monthly mortgage payments to a level that is acceptable to the bank.

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The Cons of Buying Mortgage Points

The biggest hardship to buying points is paying for them. Some people struggle just to save enough for the down payment to buy a home, and every point on a $250,000 loan costs another $2,500. That only saves you approximately $40 per month. Over the course of your loan, this can add up to significant savings, but you may not feel the difference in your monthly budget. Plus, you may have better, or more urgent, uses for your $2,500.

The length of time that you plan to own the house is another important factor. You may be in love with the idea of your new home. Perhaps you can't foresee moving again, but careers often lead you out of state. As you advance in life, you may be looking to advance in your house, as well.

Most homeowners will buy more than one house, and it takes about 62 months of mortgage payments to break even with the upfront expense of buying points. If you are not planning to stay in your house for a long time, points may not be the best use of your money.

The decision to buy points can be a tough one. If you can commit to setting aside and investing the extra money that you save each month, or if you can put it back into the mortgage payment to pay off the loan earlier, you can come out ahead over the course of your loan. Using a mortgage calculator can help you see whether buying points makes financial sense for you.