Mortgage Points Could Lower Your APR. Here’s Why You Probably Don’t Want to Buy Them Now

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Mortgage points allow you to buy down the rate you’ll pay by prepaying interest. Learn why they’re not a good idea in this rate environment. 

When you get a loan to buy a house, you want to pay the most affordable interest rate possible. After all, you will be paying your home loan for decades, so if you are charged a high rate, you’ll pay a fortune in interest.

Most mortgage lenders do give you the chance to lower your rate, though. You can do this by buying points. A point costs 1% of the total amount that you are borrowing and it will reduce your rate by 0.25% So if you borrow $500,000 and your rate would be 7.00%, you could pay $5,000 to buy a point and bring your rate down to 6.75%.

There are some times when it is smart to buy points since you can reduce monthly payments and total borrowing costs over time. Now is probably not one of those times. Here’s why.

Why you may not want to buy points right now

You likely don’t want to buy mortgage points in this current market because mortgage rates are really high right now — higher than they’ve been in decades. Since rates are high, it may seem like it makes more sense than ever to buy points and bring them down. But that’s not necessarily a smart move.

See, when you pay the upfront fee to buy points, it takes a while to break even for that initial fee. Let’s take our above example of the $500,000 loan at either 6.75% or 7.00%, assuming you get a 30-year fixed rate mortgage. Here’s what your payment would look like depending on whether you bought the point to get the lower rate.

You’d save $84 a month on your monthly mortgage payment due to the fact you’d pay less interest each month at the lower rate. But you’d have paid $5,000 in order to be able to score this savings. At a rate of $84 in savings each month, it would take you 59.5 months (or close to five years) before you end up making up for the initial money you paid for the point.

If you kept the mortgage loan beyond that five-year time period, then you’d continue to enjoy that $84 a month in savings for the rest of the time that you have the mortgage. But if you refinanced your loan at any time during the next 59.5 months, you would not make up for the initial money you spent on buying down your rate.

This means it makes sense to invest in points only if you’re confident you’ll keep your loan for five or more years. And, since rates are so high right now, you’d only want to do this if you assume rates won’t drop enough in the next five years for you to refinance at a lower rate.

Many experts believe mortgage rates are going to fall by the end of 2024, and there’s reason to believe that today’s high rates simply are not sustainable over the long term. So unless you want to place an expensive bet on rates staying near record highs for years to come, it very likely does not make sense to spend thousands to buy down your rate.

Make a smart choice about buying mortgage points

No one can predict with certainty what mortgage rates will do. If you believe that you’re going to stick with the loan you get today for long enough to break even on the upfront costs of points, then buying points may be the right choice for you.

Just be sure you do the math and really consider how long it’s going to take you to break even for buying down your rate. You may just find that it makes little sense to commit to staying with your current loan for that long.

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