Are mortgage points worth it?

Are mortgage points worth it?
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Home buyers always have plenty on their mind when it comes to choosing a home loan, including questions such as are mortgage points worth it? Yes, mortgage points will reduce the interest rate that you need to pay for the term of loan, but this doesn’t necessarily mean they’re right for all. 

Before committing to the best mortgage lenders, and making a decision over mortgage points, you should think about the length of time you expect to live in that particular home. Generally, the more years you think you’ll stay in the same place, the more likely it is that mortgage points are worth it.

What are mortgage points?

Mortgage points, which are also sometimes called discount points or discount fees, allow you to pay an upfront fee to reduce your interest rate. That means you pay more upfront, but your monthly payments will be lower going forward. 

Typically, a mortgage point costs 1% of your overall mortgage loan - so you’re looking at $2,000 on a $200,000 mortgage. Buy one point, and you can expect to see the APR you’ve been offered drop by 0.25% - so perhaps from 3% to 2.75% - for the lifetime of the mortgage.

Break-even point

As the interest rate has been reduced, you’ll pay less on your monthly mortgage payments. However, the key to working out whether mortgage points are worth it is to calculate whether what you save will eventually offset the amount you paid to secure the mortgage points. 

When the combined savings that you’ve made on your monthly payments are equal to the cost of the mortgage points you bought, you will have reached the break-even point. From there on, you will know that every regular payment you subsequently make means you’ve saved money on your mortgage deal overall, and buying mortgage points has been worth it. 

Buying mortgage points can tempt when you're arranging a mortgage loan, but how do you know when are they worth it?

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Working out if mortgage points are worth it

Before buying mortgage points, the easiest way to check whether mortgage points are worth it is to use a points calculator. Simply input the figures that it needs relating to loan amounts, terms, interest rates, the cost of mortgage points, and so on, and it will quickly tell you the break-even point at which you’ll recoup the amount you spend on points. 

If you anticipate staying in that property for the amount of time it takes to “break even”, then the mortgage points might be worth it. However, if you think you might want to sell the home before the break-even point, purchasing mortgage points is probably not worth it.

Other considerations 

When considering how long you’re likely to stay in a home, be realistic, and think about how your circumstances might change in the short and long-term. Is there a chance you’ll need to move for work purposes, or could starting a family soon be on the agenda, and perhaps necessitate a move to a larger home. 

Also think about what mortgage you can afford and whether the money you have earmarked to buy mortgage points might be needed - or better used - elsewhere. It’s probably not a good idea to use all your savings purchasing mortgage points if you’re leaving yourself with no emergency funds in reserve. There’s also a chance that the funds could be earning you money in other ways, perhaps through online stock trading, that could end up more worthwhile than the savings you make through lower mortgage payments, particularly if the break-even point is a long time in the future.  

Are mortgage points worth it?

Unfortunately, there is no definitive answer that we can give to suit all. Determining whether mortgage points are worth it will always depend on individual circumstances, and the plans that you have in mind. If you stay in the property beyond the break-even point, then savings will be made. And if they exceed the returns that could be delivered by investing your money rather than using it to buy mortgage points, then mortgage points are probably worth it. 

However, think about what else you might need that money for in the future, and how likely it is you’ll live in the same place to firstly break even, and then make the savings going forward worthwhile. If there's a chance you'll move house ahead of time, or will enlist the services of the best refinance mortgage companies in the near term, mortgage points are probably not for you. 

Ultimately, many realize that spending now to try and secure savings years into the future comes with too many unknowns to make mortgage points a worthwhile option. 

Tim Leonard

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.