When Should You Pay Mortgage Points?

After years of saving and months of hunting for the perfect Colonial on a tree-lined block, you’re finally ready to buy your first home. Now you have to navigate the maze of homebuying terms — many of which don’t make sense. Case in point: mortgage discount points. What are they? And should you buy them?

Essentially, when you pay a mortgage discount point, you’re paying to lower your mortgage’s interest rate by one quarter to a half of a percentage point. This, in turn, reduces your monthly payment. And you can buy multiple points. Each usually costs about 1 percent of the total amount you’re borrowing. That means if you’re taking out a $100,000 mortgage, each mortgage point you buy will cost $1,000. (Bonus: Mortgage points are tax-deductible.)

WHEN IT MAKES SENSE TO PAY MORTGAGE POINTS

You pay a hefty amount upfront to save money over time, so before you decide if it’s worth paying mortgage points, you have to do a little math first.

Are you buying a starter home that you only plan to live in for five years? Then you may end up spending more to buy the mortgage points than you would get back in savings on interest over those five years. But let’s say you found your dream home — there's a great school down the street and enough room in the backyard for the pool you've always dreamed of. If you don't plan to move anytime soon, then buying mortgage points might mean big savings over your 20- or 30-year loan.

RELATED CONTENT: Want to learn more about this topic? Our complete guide to buying a home can help you prepare for one of the largest purchases you’ll ever make.

For example, if you took out a $200,000, 30-year mortgage at a 5% interest-rate, you would pay about $1,074 per month and a little more than $186,512 in interest. But if you were able to reduce your rate to 4.25% by buying three mortgage points, you would pay just $984 per month and only $154,197 in interest over the life of your loan. That’s a savings of about $90 per month, or $32,315 in total interest — all at a cost of just $6,000 in mortgage points!

Under the above scenario, you would have to stay put for just over five and a half years to recoup the cost of your mortgage points. So if you’re planning to stay longer than that, buying them would probably make sense.

You pay a hefty amount upfront to save money over time, so before you decide if it’s worth paying mortgage points, you have to do a little math first.

WHEN YOU MAY WANT TO SKIP PAYING MORTGAGE POINTS

Think you might want to move in a few years to a house with a bigger backyard for Fido and the kids? Or think you could be transferred to another city when your next big promotion hits? If so, buying mortgage points likely isn’t worthwhile.

The same goes if you plan on aggressively paying down your mortgage or if you think you might want to refinance your loan in the near future to get a better interest rate, either because rates go down or because your credit score improves.

Another reason it might not make sense: Mortgage points are expensive. Covering your down payment and closing costs may already require you to marshal every available cent you have just to get the keys to your new home. In that case, the last thing you want to do is empty your accounts or raid your emergency fund just to pay for mortgage points.