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Can Mortgage Points Be Financed?

By Jim Micheals

Financed mortgage points save money over time but may cost borrowers more when refinancing. Discover how to evaluate options and maximize benefits.

Financed mortgage points may reduce monthly payments substantially. Restrictions apply however and may unreasonably restrict a borrower’s options. Carefully weigh potential savings against potential burdens before making a decision.

How to Make Money with Financed Mortgage Points

Lenders typically approve a variety of interest rates when offering a loan to a new customer. The variation in rates occurs because of the option to prepay interest charges. For example, a borrower may select an option to prepay 1% of a loan in advance to receive a 5% fixed interest rate. Alternatively, a borrower may refuse a prepayment and receive a 6% fixed interest rate. The 1% prepayment in this example is one point in industry terminology.

Financed mortgage points reduce total interest charges over the life of a loan but do not increase closing costs. At first glance, financed mortgage points appear to be a great way to save money. However, lenders typically include a variety of prepayment restrictions in loan agreements to insure that borrowers pay all points before refinancing.

Evaluating Savings

Consider using a financial calculator or a favorite computer spreadsheet to calculate savings. Remember to include the cost of financed mortgage points in the original principal balance. In the example above, prepaying 4% in advance reduces all monthly principal and interest payments by approximately 10% over 30 years. On a $100,000 loan, the monthly savings is approximately $40. Over 30 years, the $40 monthly savings amounts to $14,400 for an original cost of $4,000.

Prepayment restrictions vary among lenders. When reviewing loan offers and prepayment options, always consider the possibility of refinancing. If interest rates drop suddenly, refinancing at a lower rate would sacrifice interest prepayments paid in cash at closing. Additionally, when principal includes prepayments, refinancing may not be an option.

Related posts:

1. How to Determine Best Mortgage Rate With & Without Points?
2. What Are Points On A Mortgage Rate And How Do They Affect My Loan?
3. How Many Times Can I Refinance My Mortgage To Get The Best Rate?
4. How Should Points Affect The Way I Shop For A Mortgage?
5. Are Mortgage Points A Good Investment?