Do I have to pay points to lower my mortgage interest rate?

Pay points to lower mortgage interest rates

Mortgage rates are at 20-year highs, making it difficult for some homebuyers to buy a home.

Freddie Mac (FMCC) said the average 30-year fixed mortgage rate was 6.95% in the first week of November, down from the previous week’s peak of 7.08%. This was the highest since May 2002. Median home price was just $182,400.

Higher financing, combined with soaring home prices, has forced buyers to struggle to find affordable alternatives.

One proven strategy is to pay with points. Low mortgage payments.

Sounds like a good plan in theory, but is it worth the points?

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Paying Points – Expenses and Break-Even Time Frames

There are at least two ways of thinking about paying points.

The first argument says you shouldn’t pay points because you don’t know how long you’re going to hold your mortgage. Points are non-refundable.

The counter argument is that paying points gives you an just need to estimate the length of time you will have a mortgage.

For the sake of discussion, let’s see how long a mortgage must be held.

However, there is no standard discount rate for each point spent. It depends on the loan product, the original interest rate, the credit profile and even the mortgage market at the time. In fact, today’s market is so unpredictable that paying points on many mortgage products can be prohibitively expensive.

With that said, let’s look at some hypothetical scenarios that might fall within the broad range of rate-to-point relationships.

loan amount








amount of points




Start rate*




Fee after point payment*




Savings on monthly payments




Monthly Interest Savings**




Number of months until payments are evenly distributed




Number of months to break even for interest


twenty four


*Charges or fees listed are examples only and may not currently be available from any lender. **Interest savings are approximate as principal and interest payments fluctuate each month. Interest savings are higher than payment savings because the lower the interest rate, the greater the principal portion of the payment.

In the hypothetical scenario above, it would take about 2-3 years for the points payout to reach equilibrium. Then start saving money.

Therefore, to save a significant amount of money, you need to keep your home and mortgage for at least 5-6 years.

“Don’t Pay for Points” Camp

Considering the five-plus year period before you start saving money, you can see why many experts discourage paying with points.

Imagine paying 3 points on a $500,000 mortgage. This equates to $15,000. Instead of a rate closer to 7%, you get a rate in the high 5s.

A year later, however, a recession hits and interest rates drop to 4.5% (which mimics what happened during the 2008 recession, although economists believe the next recession will I don’t expect it to be that serious).

What is your occupation?You are had Good rate at the time. However, it is now well ahead of the market. Know how much it costs and keep the rate, or swallow the sunk cost and refinancing.

Now suppose you didn’t pay the extra points. Rates are going down for him in a year, and the rate he is able to reduce by 2.5%, an amazing savings of $800 per month. It doesn’t take a math expert to realize it’s the better deal.

Sure, paying points can give you an edge, but the price has to stay high for a long time. And history shows that after a rapid rise in mortgage rates, they tend to bounce back.

Will the rate drop and my points will be a waste of money?

All it takes is a small market adjustment and the points you paid for are a huge waste of money.

Tom Pessemier, branch manager and mortgage advisor for AnnieMac Home Mortgage in Midlothian, Virginia, advises clients to avoid “buying down” interest rates with points.

“I don’t really encourage most customers to buy up,” says Pessemier. “I’ve got information from top fixed income analysts that by this time next year he’ll be back in the 5s.”

Pessemier goes on to say that there are many caveats to that prediction. But he incorporates these predictions into every rate-related conversation he has with his customers, especially first-time buyers.

The last thing mortgage professionals want is customers who regret paying points.

One situation where points make sense

If you’re getting substantial closing cost credits from the seller, builder, down payment, or other party to the deal, it’s worth paying points.

Mortgage rules stipulate that credit must be lost if not used. Cash will not be accepted at closing time.

For example, you received a huge $12,000 credit from a desperate seller, but your closing costs are only $8,000. Anything over $4,000 can be redeemed for points to lower the rate.

Still, instead of extra credit, it might be wise to ask for a $4,000 home price reduction. That way, even if you refinance in less than a year, you still have an advantage.

Do I have to pay with points?

Paying points involves a lot of risk. yes, lower rates and payments look attractive. However, it is generally unwise to increase your initial costs and reduce your cash emergency fund.

Some buyers still pay points, but if they believe they’ll stay home and have a mortgage for years and years, that’s fine.

But those who are unsure should avoid paying points.

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More from Mortgage Research News:

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5 tips for buying a home with mortgage rates at 20-year highs

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