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Revisiting Mortgage Points

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  • Revisiting Mortgage Points

    New resident buying a starter home (don't freak out- wife works, affordable house, and we will be staying in the area long term b/c of family, job market, low cost of living, it's home and we love it)

    I want to revisit the idea of mortgage points. I always thought that buying discount points didn't really change your long term costs in a significant way, otherwise the banks, wouldn't offer them. Am I wrong on this? Would it make sense to buy discount points in this market?

    Our best quoted interest rate is 4.25% on a 30-year fixed.

  • #2
    There’s mortgage calculators out there, for instance: https://www.mtgprofessor.com/calcula...ulator9ci.html

    Generally the longer you will stay (and probably more important to consider, the longer you will go without refinancing) the more you will benefit from buying points. Also if there are any seller concessions (probably not in this market) that more than cover your other closing costs you can use these towards buying points.

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    • #3
      There are some break-even calculators online that show you how long you would need to continue owning a certain place to make discount points worthwhile.

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      • #4
        As auggie noted, you are interested in how long you keep the mortgage, rather than how long you stay in the house. During the long decline in interest rates, we refinanced multiple times. Never paid points.

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        • #5
          Mortgages are a pretty sweet type of debt. Fixed mortgages have no possible increase in interest rates. If rates go up, you are sitting pretty. If your financial situation changes, they cannot call the loan unless you are in default.

          And then, when rates go down, you can refinance and lower your rate. So good protection from the downsides and good options for an upside with falling rates.

          Points are only worthwhile if you stay in the house a long time. It generally takes in the range of 7 or 8 years to break even on points. The majority of people buying a started house will either move, or refinance if rates go down, before that break even point. If you think rates will only go up for the next decade, not down, and if you don't think you will be in another house within a decade, then points might make sense. In general, for the majority of buyers, mortgage points are best avoided.

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          • #6
            Hard to say what the right answer is. Paying points is deductible and can be a good situation, largely depending on prevailing interest rates and how long you hold the mortgage. We got lucky. Got a 30 year near the nadir and bought points. Odds of seeing those rates again are very low and we plan on being here for decades. So it was a no brainer for us. Risky the higher the interest rates and for a starter home situation.

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