Figuring out when buying down the rate makes sense depends on the cost, your financial position and your short-term plans. Mortgage points work differently depending on the type of mortgage point you're talking about:. As we go over mortgage points below, we'll be specifically addressing discount points. Origination points can be much easier to compare and understand—figuring out when to purchase discount points isn't as straightforward.
How to Calculate Mortgage Points You'll want to figure out the break-even point when you're trying to decide if you should buy mortgage points. This is the point at which the upfront cost you pay to lower your interest rate is matched by the interest savings that result. We'll use these amounts for the calculations made below, but know that some mortgage lenders may use a different price point or reduction amount. Regardless of the cost and rate change, a straightforward way to find your break-even point is to divide the cost of the mortgage points by your monthly savings.
If buying a point on your year mortgage means the interest rate changes from 4. Your break-even point is 3, divided by 44, which is about 68 months. Purchasing more points could significantly decrease your monthly payment, although it might not change your break-even point much.
However, the break-even point only increases by one month. Other factors can also impact your break-even point. For example, you may be able to finance the discount point purchase, but doing so could extend your break-even point due to interest. Additionally, if you purchase points with an adjustable-rate mortgage , the lower interest rate might only apply to the initial fixed-rate period. Purchasing points is essentially prepaying interest, which means it may be a tax-deductible expense.
If you meet the IRS' requirements , you may be able to take the full deduction in the first year. Otherwise, the deduction will be spread out over the lifetime of the loan. In either case, whether this alters your calculations depends on your overall financial and tax situation. Scenarios Where Buying Mortgage Points May Make Sense Understanding how much points cost, the impact on your monthly payments and your break-even point is a good place to start.
From there, you can consider your specific situation to determine if buying points is a smart idea. However, if you need the cash for other expenses—such as moving, remodeling or monthly bills—you want to make sure buying points won't leave you in a bind.
Additionally, if you plan on selling the home soon, or you think you might refinance, the savings from buying a lower interest rate will be limited.
In fact, if you suspect you might not stick with the same mortgage for long, it could make more sense to ask for lender credits rather than buying mortgage points. Lender credits could basically be seen as selling points rather than buying them, because the lender pays you to accept a higher interest rate.
It can make sense if you're having trouble affording a down payment or the closing costs. Or if you suspect you may move or refinance soon. How to Buy Mortgage Points You can buy mortgage points by making an arrangement with your lender before the loan closes. You may have heard of a no-closing costs mortgage. But the higher rate means a higher monthly payment. While mortgage interest in still tax deductible, the Tax Cuts and Jobs Act of puts a cap on the amount of mortgage interest that may be deducted.
Because discount points are prepaid interest, they may be deducted as part of your home mortgage interest. See the details here. Show the estimates to a tax preparer or tax accountant to find out how paying points could affect your taxes.
How we got here. How this calculator works. Desired loan amount. Loan term years. Get answers to questions about your mortgage, travel, finances — and maintaining your peace of mind.
Understanding your results:. Does buying points pay off? Is buying mortgage discount points a smart idea? Buying points could be helpful if:. Buying mortgage discount points What are mortgage points? What do points cost? Are mortgage points tax-deductible? While buying discount points on your mortgage is effectively prepaying interest, an annual percentage rate APR is a way to facilitate the comparison of loans among different rate and point combinations.
It incorporates not just the interest rate, but also the points you pay and then any fees that the lender charges for providing the credit. One rate might even seem attractively low, but that could be due to points already factored in that you might not want to pay. On Bankrate, we specify whether advertised mortgage rates include points so you can make a fair comparison between lenders. If you can afford to buy discount points on top of the down payment and closing costs , you will lower your monthly mortgage payments and could save lots of money.
The key is staying in the home long enough to recoup the prepaid interest. If you sell the home after only a few years, or refinance the mortgage or pay it off, buying discount points could be a money-loser. This shows that the borrower would have to stay in the home 71 months, or almost six years, to recover the cost of the discount points.
Origination points are fees paid to lenders to originate, review and process the loan. Origination points typically cost 1 percent of the total mortgage. So, if a lender charges 1. You can decide whether or not to pay points on a mortgage based on whether this strategy makes sense for your specific situation. Sometimes, origination points can also be negotiated. Homebuyers who put 20 percent down and have strong credit have the most negotiating power, says Boies.
Taxpayers who claim a deduction for mortgage interest and discount points must list the deduction on Schedule A of Form Each year, you can deduct only the amount of interest that applies as mortgage interest for that year. The points are deducted over the life of the loan, rather than all in one year. Buying mortgage points is a way to pay upfront to lower the overall cost of your loan. It makes the most sense if you plan to be in the home for a long period of time.
For many borrowers, however, paying for discount points on top of the other costs of buying a home is too big of a financial stretch, and buying points might not always the best strategy for lowering interest costs. A bigger down payment can get you a better interest rate because it lowers your loan-to-value ratio , or LTV, which is the size of your mortgage compared with the value of the home. Overall, borrowers should consider all the factors that could determine how long they plan to stay in the home, such as the size and location of the property and their job situation, then figure out how long it would take them to break even before buying mortgage points.
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