Mortgage Points

[LuckyRobin]

How do points work on a mortgage?

[MonkeyMama]

Points are basically prepaid interest.

1 point = 1% of loan balance. So if loan balance is $100,000, 1 point cost $1,000. In exchange for points, you get a lower interest rate on the loan.

On a refi, you can deduct the points over the life of the loan, if you itemize (for taxes). On a purchase, I believe you can deduct up front, for primary residence (I'd have to check).

I've only paid points once - made sense since we plan to keep this house a couple of more decades. But, I was gambling that rates were lowest they would ever be. I am not bothering this time -I actually think we will probably refi again to a 15-year. Otherwise, I may consider points again (in the middle of a new refi). I am glad we didn't pay points any other time, but how was I supposed to know rates would fall from 8.25% to 4% in just one decade? We've refied every 1% down. Yeesh. (& frankly I hate refinancing, which is maybe why I feel the allure of points. Some people are happy to skip the points and just refi refi refi every 0.50% down - no cost refis. VErsus my *I hate refinancing and only do it when I can't ignore the obvious that I will save a TON and it would be silly not to.* Which tends to be about every 1% drop. IS it ironic that at 4% is the first time I assume this won't be my *last refi ever?* I'm resigned to *lord knows, anything can happen.*)

I definitely wouldn't pay points on a home I didn't expect to keep very long. The longer you keep the loan, the more the points pay off.

[LuckyRobin]

Okay, thanks. We didn't have them on our last mortgage so I've never paid attention before. So for the long term (a house you'd be keeping), 1.5 points on a 3% interest rate would pay off, then?

[MonkeyMama]

Okay, thanks. We didn't have them on our last mortgage so I've never paid attention before. So for the long term (a house you'd be keeping), 1.5 points on a 3% interest rate would pay off, then?

I'd think so. What are the odds you'd ever get a rate lower than that???

For reference, though we only waited 3 years to refi again, we still came out ahead when we paid points. It can happen. It just pays off more in the long run.