Mortgage Financing - Points or no Points?

By
Mortgage and Lending with PNC Mortgage NMLS# 445143

I have been a mortgage Loan Officer for over 25 years.  When I started working in this business, borrowers were aware there were points associated with mortgage loans.  I believe the custom of paying points has become lost in a borrower's desire to cut down on closing costs.  The reality may be borrowers just don't understand the benefit of paying points. 

First, examine what points are.  Points are pre-paid interest and as such, points are tax deductible.  One point is equal to one percent of a mortgage loan.  It is tax deductible in the year it is paid so a portion of this fee comes back to you in the form of a tax refund.  In order to determine the advantage of points, you should first evaluate the payment advantage. 

  • Each point paid should reduce your interest rate by 1/4%.
  • Compare projected payments with and without points. 
  • Calculate the cost of points. 
  • Divide the monthly savings into the up front cost of the points. 

This will give you the number of months to break-even.  This number should be no greater than 60, meaning you should realize the up front cost of your points within a 5 year period.  Anything greater than 60 is too long to wait for a return. 

If you are planning to live in the home for more than five years, why would you not want the lowest possible payment over the term of your mortgage loan?  With rates at their lowest level ever, some would argue there is no need to pay points as you are already getting the benefit of a low interest rates.  I believe that since rates are at historically low levels you will never refinance your mortgage therefore pay as many points as you can afford, reducing  your rate and payment.  The average closing costs to refinance a mortgage is approximately one percent of the mortgage amount.  Why not pay the one percent in the form of a point and reduce your payment now? 

If you are purchasing a home and have a down payment of 25% or more, use your money wiser.  Consider putting down only 23% and using the 2% to pay for points and reduce your interest rate.  The payment with the lower interest rate at 2 points, will be lower than the lower mortgage loan with the higher interest rate and zero points.  Again, this assumes you retain the mortgage loan for more than 5 years.  Consider this, at the end of 30-years, each loan will have a balance of zero and by paying points you have 360 lower payments.

Comments (16)

Donna Yates
BHGRE - Metro Brokers - Blue Ridge, GA
Blue Ridge Mountains

Ira: Personally, I am all for getting the absolutely lowest interest rate possible.  Very helpful post.

Aug 24, 2011 06:39 AM
Ira Bodenstein
PNC Mortgage - Montclair, NJ
NMLS#: 445143

Donna,

 

Thank you, glad you found the information helpful.

Aug 24, 2011 07:00 AM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

Super tutorial for the buyer who is wondering if they should pay points or no points with their mortgage financing!

Oct 14, 2011 01:47 AM
Bill & Cyndi Daves
Hiawassee, Young Harris, Blairsville, Hayesville, Murphy and Beyond! - Hiawassee, GA
TeamDAVES - Your REALTORS In the GA/NC Mountains!

Ira - Great information.  I had never thought about reducing the amount of a (slightly) excessive down payment and use the money to buy down the rate.  Great idea and presented in a very easy to understand fashion.

Cyndi

Jan 05, 2012 01:22 PM
Connie Harvey
Pilkerton Realtors - Brentwood, TN
Realtor - Nashville TN Real Estate

Ira, what can I do to help you get going with your blog?

Jan 22, 2013 04:45 AM
Debbie Laity
Cedaredge Land Company - Cedaredge, CO
Your Real Estate Resource for Delta County, CO

Great explanation of points. I hope we will be seeing more blogs from you very soon. You spelled this one out very well.

Mar 10, 2013 10:35 PM
Silvia Dukes PA, Broker Associate, CRS, CIPS, SRES
Tropic Shores Realty - Ich spreche Deutsch! - Spring Hill, FL
Florida Waterfront and Country Club Living
Ira, points or no points, it's still a topic worth discussion! Thanks!
Mar 16, 2013 11:11 AM
Wayne Zuhl
Remax First Realty II - Cranford, NJ
The Last Name You'll Ever Need in Real Estate

Hi Ira - So happy to see you here on Active Rain! 

Apr 17, 2013 06:43 AM
Lloyd Binen
Certified Realty Services - Saratoga, CA
Silicon Valley Realtor since 1976; 408-373-4411

Ira-this is information all home buyers should read and understand.  Excellent explanation of points.

Sep 24, 2013 02:19 PM
Suzanne McLaughlin
Sabinske & Associates, Inc. (Albertville, St. Michael) - Saint Michael, MN
Sabinske & Associates, Realtor

Ira, this is really one of the best explanations of points I have read.  You should write more!

Jun 06, 2014 12:31 AM
Wayne Zuhl
Remax First Realty II - Cranford, NJ
The Last Name You'll Ever Need in Real Estate

Hi Ira,

looking forwaard to reading more posts from you!

 

Nov 23, 2014 11:54 AM
Ron Marshall
Marshall Enterprises - Saint Michael, MN
Birdhouse Builder Extraordinaire

Ira, this is great information.  I hope that you post more great information soon!

Feb 02, 2015 01:19 AM
Larry Johnston
Broker, Friends & Neighbors Real Estate and Elkhart County Subdivisions, LLC - Elkhart, IN
Broker,Friends & Neighbors Real Estate, Elkhart,IN

Hi Ira Bodenstein   Thnks for the information.  It's always nice to have information from other members.

Mar 15, 2015 12:58 PM
Roy Kelley
Realty Group Referrals - Gaithersburg, MD

This is good information for prospective mortgage borrowers.

I hope you are enjoying a most productive month.

Mar 22, 2015 09:46 PM
Gabe Sanders
Real Estate of Florida specializing in Martin County Residential Homes, Condos and Land Sales - Stuart, FL
Stuart Florida Real Estate

Thanks Ira.  This is an excellent explanation of how points work in mortgages.

Mar 29, 2015 09:12 PM
Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

Hey Ira, would love to see more of your posts. Thanks for dropping by my blog post today. Greatly appreciated. D 

Jul 19, 2015 04:03 AM

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