Mortgage Points May Not Be Worth Buying

By Peter McDougall

Most homebuyers would jump at the chance to secure a lower rate on their mortgage.

Many do by paying their lender a fixed amount -- called a "point" -- for every fraction of a percentage point shaved from their loan's interest rate.

While a lower mortgage rate is attractive, buying points isn't always worth the cost.

Money spent on points can instead go toward a larger down payment. Both approaches will lower your monthly payments, but it takes longer for the benefits of paying points to outweigh the benefits of a larger down payment.

A mortgage point equals 1% of your loan and generally involves a 0.125% reduction in your interest rate, per point -- although the rate cut will vary from lender to lender. Using a calculator such as the one found on BankingMyWay.com can help you compare how much you'd save by paying for points with what you'd save by increasing your down payment.

To find out which choice is likely best for your situation, enter your loan amount, the term and the interest rates -- with and without points -- into the calculator. Also include the number of years you expect to live in your home.

Despite the lower monthly payments, increasing the down payment may be the better choice unless you plan to live in your home for longer than 14 years. The reason? The bigger down payment helps to build equity faster so that you own more of your home when it comes time to sell. Only after 14 years will the interest savings from the lower rate surpass the increased equity from the larger down payment.