Take a Pass on Points?

Paying points to a mortgage lender could shave as much as a full percentage point off your loan rate. As attractive as that may sound, however, it doesn't always make sense to pay.

Mortgage points are fees that a lender charges at the closing, with each point representing 1% of the total mortgage. On a $300,000 mortgage, for example, three points would translate into a cash payment of $3,000 up front. Points are unheard of outside of the US, but here mortgage applicants have the choice of the paying points in return for a lower interest rate. Depending on how many points the lender charges, paying the points could shave as much as a full percentage point off your loan rate. The question is, should you pay them?

Borrowers who are short on ready cash may be forced to opt for a low-point high-rate mortgage. Those who are stretching the limits of their income to cover the mortgage payment may be better off paying the points to get a lower monthly payment. If neither of these scenarios applies to you, you have a choice, and the most important factor in that choice, say mortgage professionals, is how long you plan to stay in the home. If you plan to stay in the house for several years, paying the points to get a lower monthly payment makes a lot of sense. If you think you might move within a few years, paying points might not be a good idea.

Another possible factor is whether the points you pay are deductible. Points you pay on a mortgage on a new home are fully deductible in the year you pay them. On a refinanced mortgage, however, you must amortize the points. In other words, if you pay $3,000 in points on a 15-year refinanced mortgage, you must spread your write-offs over the length of the mortgage, deducting $200 a year over the 15 years.

To help you calculate whether to pay points or not, visit this Web page.