Should you buy down points? : Rooftop Views

Rooftop Views

Should you buy down points?

We came across a study by two experts about whether or not to buy points to lower the interest rate on your mortgage. Their conclusion, most often it doesn't pay off.

Generally, they found that those who buy points overestimate the amount of time they will hold their loans. Usually they paid off their mortgages over 3 years too early for the points to actually pay off.

As you know, buying points lowers the interest rate on the mortgage. One point is equal to 1 percent of the mortgage, charged as prepaid interest. In order for that up front payment to make sense, the mortgage must be in existence long enough to recover the up front costs. That length of time differs with the length of the loan, the amount of the mortgage and the number of points bought down.

According to the study by Abdullah Yavas Elliot of Penn State and Yan Chang of Freddie Mac, only 1.4% of borrowers who purchased points held their loans long enough to make it pay off. Of those who didn't buy points, only 1.5% would have been better off purchasing them.

Maybe it makes more sense to take the money that would have been spend on points and either pay down the mortgage or put it into a savings account earning interest.