Mortgage Financing - Points or no Points?

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.