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How Many Points Can You Buy on a Mortgage?

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There are many things to consider when purchasing a home—location, school district, neighborhood, affordability, and type (single family vs. multifamily) just to mention a few. Once you’ve found your perfect home, you must choose the best mortgage type—fixed-rate or adjustable. And then you can decide whether to buy points.

 

WHAT ARE POINTS?

Points are a type of discount that allows you to buy down your mortgage interest rate. You buy points when you purchase your home. They increase your closing costs but ultimately reduce your monthly mortgage payment. They don’t impact your loan-to-value ratio or your down payment; they strictly impact your monthly payment.

When purchasing points, you will pay a certain percentage of your mortgage loan. The most common number of points associated with a mortgage are one and three points. Each point is a percent of your mortgage amount, so if you choose one point, you pay the lender 1% of the loan amount in order to get a lower rate. If you choose three points, you pay 3% of the loan amount.

 

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ARE POINTS WORTH IT?

Whether points are worth it in your situation or not depends on a number of things but there are two main questions that can help you come to a conclusion—do you have limited funds for your down payment and closing costs? And how long do you plan to be in your home?

If you have limited funds when you buy or refinance your home, you may have to use your available funds to make your down payment rather than to purchase points. However, if you have excess funds, points may be worth considering.

That said, if you plan to sell your home before the mortgage is paid off, you won’t enjoy the full benefit of interest-rate savings of buying points. But if you plan to be in your home for several years, paying points may be worth it because it will reduce the cost of every payment, which really adds up over the duration of your loan.

It’s a good idea to talk to your mortgage lender about the pros and cons for buying points. They can help you determine the best option for you, based on your situation.

 

ARE MORTGAGE POINTS TAX DEDUCTIBLE?

Only your public accountant or tax preparer can tell you whether your mortgage points are tax-deductible, based on your current financial situation.

 

HOW DO POINTS AFFECT MY INTEREST RATE?

As mentioned above, one point will make a 1% difference to your mortgage amount. Here’s an example of a 30-year, $100,000 mortgage (based on rates from December 5, 2019). Note the difference between interest payments and rates as the number of points goes up.

 

Points

Fee*

Principal/Interest Pmt.

Rate

0

$0.00

$463

3.75%

1

$1,000

$449

3.50%

3

$3,000

$428

3.125%

*Note: The fee for one point is one percent of the loan. One percent of $100,000 is $1,000.

 

As you can see, the monthly payment with three points is $35 less per month than the zero-point option. However, you pay $3,000 to get the lower rate. It will take you about 86 payments to offset the cost of the points (3,000/35=85.71 payments). So, if you don’t plan to own your house for more than 86 months, buying three points would not make sense for you.

 

SHOULD I BUY POINTS OR MAKE A LARGER DOWN PAYMENT?

Points reduce your interest rate while down payments reduce your total loan amount (which ultimately reduces your interest rate). Dollar for dollar, points generally save you more money than a down payment, so the deciding factor can often be how much money you have at closing.

 

Here is an example to illustrate how it works: We’ll stick with the 30-year, $100,000 mortgage. You can choose to pay an extra $1,000 down or you can buy one point (which will cost you $1,000). Here is what the numbers look like:

 

Method

Cost

Principal/Interest

Anticipated Interest

Extra down payment

$1,000

$458.48

$66,055.65

Purchase of one point

$1,000

$449.04

$61,657.36

 

As you can see, you can save over $4,000 by buying down your interest rate rather than paying down your loan in this scenario.

 

IS THERE A MAXIMUM AMOUNT OF POINTS YOU CAN BUY?

The maximum amount of points you can buy will depend on which financial institution you borrow from, so you will want to check with your mortgage lender. One-point and three-point programs are the most common, but they are not always the only options.

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