Ask the Expert
What does it mean to buy points?
If you are buying a house and plan to stay there for a long time, you might consider buying down the interest rate on your mortgage. That is what 'buying points' means.
According to CNBC about 49 percent of homebuyers today are doing that to lower their interest rate. Paying a fee of 1% of the loan amount usually reduces your interest rate by up to .25%, and that can be wise over the long term.
Buying points is best for people who plan to live in the house for five to seven years. If you are going to save $60 a month by spending $4,000 on points, for example, it will take more than 5 years to recover that investment.
There is a tax benefit to buying points, at least for some people. People who itemize can deduct the cost of points as prepaid mortgage interest, so long as they are using the home as their primary residence. A good tax deduction can often lower the tax you owe or even drop you into a lower tax bracket. However, that is only if you itemize. Most people take the very substantial standard deduction, which for tax year 2024 is $29,200 for married couples filing jointly.
Consider what strategies might benefit you most when considering points. For example, the cost of buying points on a $200,000 house is $2,000 per point. One point could lower your interest rate by 0.125% to .25%. If you buy two points on a $200,000 mortgage for $4,000, your interest rate could drop by as much as a half a point, let's say from 5.5% to 5%. That could save you from $60 to $70 per month, depending on the interest rate.
But, that doesn't make sense if you haven't put down 20% on your loan. Without a 20% downpayment you will be paying Private Mortgage Insurance, which will increase your monthly payment. A 1% annual PMI rate could increase the payment on a $200,000 mortgage by more than $150. So if you have extra cash, getting to a 20 percent downpayment is a good idea.