Pay Now, Save Later — But Is It Worth It?
When you get a mortgage quote, you'll see an option to buy "points" to lower your interest rate. Each point costs 1% of your loan amount and typically reduces your rate by about 0.25%. Sounds simple, but the math matters — a lot.
What Are Mortgage Points?
Mortgage points (also called discount points) are upfront fees you pay at closing to permanently reduce your interest rate. They're essentially prepaid interest.
The Basics
Example
$350,000 loan at 6.25% vs. buying 1 point:
You'd pay $3,500 upfront to save $57/month. After 61 months (about 5 years), you've recouped the cost. Every month after that is pure savings.
When Buying Points Makes Sense
1. You're Staying Long-Term
If you plan to stay in the home (or keep the mortgage) for longer than the break-even period, points pay off. If you'll move or refinance in 3 years, you'll lose money on points.
2. You Have Extra Cash
Points require cash at closing above your down payment and closing costs. If you're stretching to cover your down payment, points probably aren't the right move.
3. Rates Are High
When rates are elevated, the dollar savings from each point is larger, making the break-even period shorter and the long-term savings greater.
4. Seller Concessions Are Available
Here's a powerful strategy: negotiate for the seller to pay for your points as part of the deal. The seller contributes the upfront cost, and you get a permanently lower rate. This is especially effective in buyer's markets.
How it works:
5. Temporary Buydowns
A 2-1 buydown is a different strategy where the rate is reduced for the first 2 years:
This is typically paid for by the seller or builder and can save you $500-$700/month in Year 1. It's a great option if you expect your income to grow.
When Buying Points Doesn't Make Sense
1. Short-Term Ownership
If you'll sell or refinance within 3-5 years, you won't recoup the cost of points. The money is better used for a larger down payment or kept in reserves.
2. You Need the Cash Elsewhere
If buying points means depleting your savings, you're taking on unnecessary risk. Cash reserves protect you from unexpected expenses after closing.
3. You Could Eliminate PMI Instead
If you're between 15-20% down, using point money to increase your down payment to 20% and eliminate PMI may save more money overall.
4. Rates Are Expected to Drop
If market conditions suggest rates will decrease, refinancing later at a lower rate is better than buying down today's rate.
The Tax Angle
Mortgage points are generally tax-deductible in the year they're paid (for a purchase) or over the life of the loan (for a refinance). This effectively reduces the cost of points by your marginal tax rate.
Example: If you're in the 22% tax bracket and pay $3,500 in points, your net cost after the tax deduction is approximately $2,730. This reduces your break-even period from 61 months to about 48 months.
Consult your tax advisor for your specific situation.
Points vs. Larger Down Payment
This is a common decision. Let's compare:
Scenario: You have $20,000 above minimum down payment. Option A: Buy points. Option B: Increase down payment.
In this case, the larger down payment saves slightly more per month AND preserves $13,000 in cash. Every situation is different — that's why we run multiple scenarios for every client.
How The Taberne Group Approaches Points
We never pressure clients into buying points. Instead, we:
1. Show you the break-even math for your specific loan
2. Compare points vs. larger down payment vs. reserves
3. Explore seller concessions to fund the buydown at no cost to you
4. Consider temporary buydowns as an alternative
5. Factor in your timeline — how long you plan to own the home
Let Us Run Your Numbers
The decision to buy points is entirely dependent on your specific situation. The Taberne Group provides detailed comparisons so you can see exactly what points would cost and save. Call us at (215) 266-0663 or start your application at movement.com. We serve homebuyers across Pennsylvania and New Jersey.