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Getting the Point of Mortgage Points

Monday, May 11, 2009

Mortgage points can save you money, but today's mortgage rates are so low that you may not need the help.

On March 2, 1962, Wilt Chamberlain scored a cool 100 points in one game, setting an NBA record that remains unbroken. Those are the kind of points that prompt cheering and chest-bumping. Mortgage points are an entirely different animal.

When you want to access lower rates on your mortgage refinance, the usual approach is to buy mortgage points. These are essentially prepaid interest charges; by paying more upfront, you can lock in a lower rate and payment for the life of your loan. One point will cost you 1 percent of your mortgage refinance balance, but the amount you save on the rate will vary by lender.

Mortgage point slam dunk?

Long-term savings associated with buying mortgage points can be significant. But even so, tapping into lower mortgage rates with purchased points may not be the right strategy for you-particularly since today's mortgage rates are already extremely low. To decide, consider the following:

How long will it take you to recoup the extra upfront costs by way of the lower monthly payment?
How much can you afford to pay in upfront costs?
How long do you intend to be in the home?

When comparing points and no-points mortgages, assume that you can either spend money upfront on buying the points, or use that dollar amount to reduce your loan balance. Say, for example, that you're shopping for a $250,000 mortgage refinance. You could purchase one point for $2,500.  But if you chose not to purchase that point, you could use the $2,500 to pay down your loan balance to $247,500.

Let's look at two hypothetical options: a 4.85 percent loan for $250,000 with 1 point, and a 4.975 percent loan for $247,500 with no points. Using a mortgage refinance calculator, you can determine that the first option implies a monthly payment of $1,319.23. The payment on the second option is only slightly higher at $1,324.85.

In this scenario, it costs you $2,500 upfront to save less than $6 per month. Since you won't break even for about 14 years, paying mortgage points wouldn't make sense if you plan on moving in that time period. But if you stay in the home for 30 years or more, the purchased points will save you a cumulative $2,027.

Mortgage rates already low

According to Interest.com, no-point mortgage rates on 30-year loans have dropped to as low as 4.875 percent. Purchasing a point or two can get that rate down to about 4.375 percent. To add a little perspective, last year's market mortgage rates were closer to 6 percent, or about a percentage point higher.

The moral of this story is that mortgage points are not like points scored in a basketball game: more doesn't always mean better. Run the numbers so you know what works best in your situation.

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