Understanding When Mortgage Points Are Worth Paying (Part 2)

In part one of this blog post we covered the basics on mortgage points (or discount points), including the costs to purchase them. We recommend reading that post if you have questions or need more information about mortgage points.

When Mortgage Points Could Be Worthwhile

If you are not planning to stay in your home for at least as long as the break-even point (and preferably longer to get some financial benefit from the points), then paying mortgage points is definitely not worth it. However, if you are planning to stay in your home for much longer than the break-even point, having a lower rate can save you a lot in interest. In the same example above, if you stayed in your home for the full 30 years of your loan, you would save more than $15,000 in interest with the lower rate.

Other Considerations

In addition to whether you plan to stay in your home long enough to realize the financial benefits of paying for a lower interest rate, there are some other things to consider.

• Tax benefits: for people who meet the criteria, mortgage points are tax deductible, which provides an added incentive to pay for points if the other reasons (including the time you plan to stay in your home) are also aligned.
• Investment opportunities: not paying points keeps more cash in your pocket at the time of closing. If you have an opportunity to invest that somewhere that it could earn interest, that may offer more financial benefit that the lower monthly mortgage. For example, if you have an opportunity to put the same $3,000 into your 401K and you can earn a decent return on that, it may be a better financial choice.
• Cash needs: beyond your mortgage, there may be other costs after buying a home for which you would want to have cash on hand; for example, adding window coverings or landscaping your yard. If that’s the case, keeping the money might be a better choice.

Even without any immediate costs, having that money in a savings account can help if an emergency comes up—for example, if your water heater breaks or you need to make some roof repairs on the new home in the next five years. If you are going to use most or all of your savings for a down payment and closing costs, consider keeping the money and putting it into a high-yield savings account instead.

The decision of whether mortgage points are a good option should be determine on a case-by-case basis depending on your circumstances. Talk to Integrity First Lending to answer questions about mortgage points and whether they’re a good choice for you.