Are Mortgage Points A Good Investment?

By Kevin Landis

Some interesting facts that answer the question “Are Mortgage Points a Good Investment?” Who benefits from prepaid points, the borrower or the lender?

Are mortgage points a good investment? To make an informed decision one must first understand exactly what mortgage points are and how they affect the loan. Mortgage points, or discount points as they are sometimes referred to, are actually a form of prepaid interest. Each “point” is equal to 1% of the total loan amount. In exchange for the prepayment of interest in the form of points the lender will offer a lower mortgage interest rate on the loan.

Why Pay Points?

Many borrowers choose to pay the prepaid points in an effort to keep the monthly payments lower. This in turn can facilitate the borrower being able to borrow more money and still qualify for the loan. Usually 1 point will shave .125% off the interest rate charged for the life of the loan.

Are Mortgage Points A Good Investment?

This depends on the borrowers intentions with the property. If it is the intention to sell the property before the break-even point then it is not a good investment. In this case the borrower will take a loss on the extra interest that was paid up front. If the borrower does not intend to sell the property until after the break-even point it then becomes a good investment.

Where is the Break-Even Point?

This can be different for each loan based on a number of factors such as loan amount, length of loan, interest rate and the number of points paid at the beginning of the mortgage. There are many calculators on the net that can give you this information.

Who Benefits Most from Mortgage Points?

So when asking “Are mortgage points a good investment?” the short answer is “it depends.” The mortgage lender benefits if the property is sold before the break-even point. The consumer benefits if the property is sold after the break-even point.

Related posts:

1. Should I Pay Points to Lower My Mortgage Interest Rate?
2. What Are Discount Points On A Mortgage Loan?
3. Does My New Refinance Rate Have To Be At Least 2 Points Lower Than My Current Rate?
4. How Should Points Affect The Way I Shop For A Mortgage?
5. What Are The Closing Costs Based On For My Mortgage Loan?