Mortgage points are fees that are paid to a lender at closing to reduce your interest rate. Basically, you are paying interest upfront in order to lower the interest rate of the life of the loan. Usually, one point equals one percent of your mortgage, or $1,000 for every $100,000 on the loan.
Every lender handles points differently, so the amount you can buy depends on the lender, the kind of mortgage loan you are getting, and the market at the time of closing.
Depending on how long you plan on staying in the home and how much you have to put down at closing will ultimately depend on if buying mortgage points is worth it. If you intend to move or refinance the home in just a few years, it probably is not worthwhile to buy mortgage points. If you need a lower closing cost, buying points is also not the best idea, since they will increase what you pay at closing.
If you get a 30-year fixed-rate mortgage for $200,000 at 5.5 percent interest and you do not buy any points, your monthly payment would be approximately $1,136. Two mortgage points, costing about $4,000, would reduce your interest rate for five percent, reducing your monthly payment by about $62, to $1,074.
With a reduction of $62, you would not get back the $4,000 you spent for over five years, or 64.5 months. If you continue to own the house for years beyond the 64.5 months, you will have saved money from the points, but if you do not intend to live in the house for more than five years, it did not save you anything in the long run.
Mortgage points are tax-deductible as interest on a mortgage, but the home has to be the collateral on the loan and the money to buy the points cannot be borrowed. If you buy mortgage points when refinancing, you may have to spread that deduction out over the term of the loan.
Consulting a tax professional in your area will get you more location-specific information on deducting mortgage points from your taxes.
Many people struggle to afford their down payment and closing costs alone, without adding in the additional money buying mortgage points would cost. If you are getting a $100,000 home, buying points is much cheaper than buying a $500,000 home, which would cost $15,000. Adding that $15,000 to a 20 percent down payment, plus other closing costs, and you may be looking at a hefty expense that might be more than you can afford.
The average homebuyer fears getting into a mortgage they cannot afford, so the potential benefits they can receive from buying mortgage points are not as worthwhile to them. Being able to pay for the mortgage is more important than scraping together more money at closing to lower the mortgage even a little.
The usefulness of mortgage points varies depending on the financial situation of each homebuyer, and how long they intend to stay in the home. If you think buying mortgage points would benefit you, consult your mortgage lender to find out how they handle them and if they would truly be beneficial to you.