Savings Secret: Pay Mortgage Points


Paying mortgage points is like dieting or eating your spinach: It's hard to do even if you know deep down that it’s good for you.

But it’s worth considering, especially now. Many people who would have had perfectly good reasons to reject the idea a few years ago might get considerable benefit from paying points in today’s housing and mortgage market.

Points are a form of up-front interest paid when a mortgage closes on a home purchase or refinancing.

Each point is equal to 1% of the loan amount. Three points on a $300,000 loan come to $9,000.

In exchange, the borrower gets a slightly lower interest rate, reducing the monthly payment.

Many people reject this option because that hefty up-front payment really stings, expecially when you're already shelling out thousands for other closing costs. And the benefits of paying points are spread over time.

On a purely mathematical basis, paying points makes sense if you will have the mortgage long enough for the lower monthly payments to offset the cost of the points.

That’s one reason home buyers should seriously consider points today. Because the housing market is shaky in most of the country, it does not make sense to buy a home unless you expect to keep it for seven, eight, even 10 years, else you could lose money on the sale. In many cases, that’s long enough to make the points pay.

The second reason: Mortgage rates are so low today that you many never find it profitable to refinance a loan you take out now. Again, that means you’re likely to have a loan long enough to profit from paying points.

According to the Survey, the average 30-year fixed-rate mortgage charges 5.225%. With the shopping tool you can find even better deals.

PenFed, the Pentagon Federal Credit Union, offers a 30-year fixed loan at 4.5% for borrowers willing to pay 2.5 points. CNB Bank (Stock Quote: CCNE) charges 5.625% for a similar loan with zero points. Bank of America (Stock quote: BAC) charges 5.25% with 0.375 points.

Use the Mortgage Points Calculator to figure which is the better deal.

It shows the PenFed loan, with $7,500 in points included in the $300,000 mortgage, would cost about $168 per month less than the zero-point CNB loan for $292,500.

If you expected to keep the mortgage for just two years, paying these points would leave you $1,592 poorer than if you had not paid them and taken the CNB deal. But if you kept the loan for three years, paying points would save you $1,259. Keep it 10 years and you’d save $21,665.

With the Bank of America loan, you’d save $1,000 in the first year, compared with the zero-point loan. You’d save $2,062 after three years and $9,386 over 10 years.

Conclusion: Paying points, even if you have to borrow the money to do it, can provide big savings over time.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at

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