Is it always smart to buy points (mortgage)?

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tomwood
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Is it always smart to buy points (mortgage)?

Post by tomwood » Sat Feb 01, 2020 12:05 pm

It appears to be simple math which can calculate the breakeven point on calculating if it’s smart or not to buy points. It appears the breakeven point is 5-6 years depending on how many points (and maybe cost of the house). While the future is unknown and it could backfire, would it always be smart to buy points if you expect to live in the house for 10+ years? Do most people buy points? It also only 1% of the mortgage so that amount used as a downpayment won’t offer much help and if someone moves or refinance within 3-4 years, it’s only a small loss for possibly a huge reward if the house is kept the life of a 30 year mortgage.
Why not buy points?

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Re: Is it always smart to buy points (mortgage)?

Post by bertilak » Sat Feb 01, 2020 12:12 pm

tomwood wrote:
Sat Feb 01, 2020 12:05 pm
It appears to be simple math which can calculate the breakeven point on calculating if it’s smart or not to buy points. It appears the breakeven point is 5-6 years depending on how many points (and maybe cost of the house). While the future is unknown and it could backfire, would it always be smart to buy points if you expect to live in the house for 10+ years? Do most people buy points? It also only 1% of the mortgage so that amount used as a downpayment won’t offer much help and if someone moves or refinance within 3-4 years, it’s only a small loss for possibly a huge reward if the house is kept the life of a 30 year mortgage.
Why not buy points?
Lots of on-line calculators for this. Google "mortgage point calculator."
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker (aka S.O.B.), the Cowboy Poet

Big Dog
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Re: Is it always smart to buy points (mortgage)?

Post by Big Dog » Sat Feb 01, 2020 12:17 pm

The short answer is, of course, it is not "always" smart to do anything. As most folks move in ~8 years, it may or may not make sense. Even if you think its your 'forever' home, life happens. Jobs change. Even if you love the company you work for, new management in the future may not love you. What if ~15 years into your mortgage you receive a couple of nice bonuses and decide to pay it off completely?

Personally, I'm not into points. I'd rather keep better options for a so-called 'no-cost refi' in the future.

lkar
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Re: Is it always smart to buy points (mortgage)?

Post by lkar » Sat Feb 01, 2020 12:20 pm

I just refinanced and am already considering doing it again so I am glad I did not pay points.

But, yeah, if you are staying for sure and feel rates are bottomed then it’s not an irrational thing to do. Just depends on your value of flexibility.

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Re: Is it always smart to buy points (mortgage)?

Post by manatee2005 » Sat Feb 01, 2020 12:21 pm

It’s not if you’ll stay in the house for 8 years. If it’s you’ll stay in that mortgage for 8 years.
I personally have never bought points.

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Re: Is it always smart to buy points (mortgage)?

Post by chevca » Sat Feb 01, 2020 12:23 pm

The math of it makes buying points look good for what OP brings up. The reality of life makes it so buying points is rarely the smart thing to do. Just my take on it, but I don't think buying points is a good idea. You're really just pre-paying interest buying them. Don't buy points and pay ahead on the mortgage on your own, if you want to do that (save interest).

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Re: Is it always smart to buy points (mortgage)?

Post by Ben Mathew » Sat Feb 01, 2020 12:24 pm

I ended up buying a good number of points all three times I faced the choice (two times buying and once refinancing). But the terms of these loans are so different that you would have to calculate the benefit for the specific loans you're offered, and not rely on a general rule to buy or not buy. In my experience, it wasn't always optimal to max out points and minimize interest rates. So you'll need to do the calculation anyway to find out what's optimal. I used a spreadsheet.

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Re: Is it always smart to buy points (mortgage)?

Post by fyre4ce » Sat Feb 01, 2020 12:25 pm

I like points, If you’re confident you’ll stay at the property. The payback period is relatively short and within 10 years they give a 10-15% internal rate of return, which is excellent. Numbers are even higher now, given that points are probably deductible but mortgage interest may not be (TCJA). It is somewhat of a gamble with how long you’ll stay at the property. If you’d keep the house as a rental if you moved out then it seems almost like a no brainer.

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Re: Is it always smart to buy points (mortgage)?

Post by TropikThunder » Sat Feb 01, 2020 1:55 pm

fyre4ce wrote:
Sat Feb 01, 2020 12:25 pm
Numbers are even higher now, given that points are probably deductible but mortgage interest may not be (TCJA).
Points aren’t a separate deductible expense, they are lumped in with the interest (“home mortgage interest and points”). Logical since points are basically pre-paid interest. If you’re over the debt limit, the deductibility of points is reduced same as the regular interest is.

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Re: Is it always smart to buy points (mortgage)?

Post by dukeblue219 » Sat Feb 01, 2020 2:04 pm

But if someone used to be itemizing mortgage interest and no longer is with the high standard deduction, prepaying a bunch of interest and deducting it all at once is a little more appealing now.

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Re: Is it always smart to buy points (mortgage)?

Post by rkhusky » Sat Feb 01, 2020 2:07 pm

It depends on how much you are paying for the points.

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tomwood
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Re: Is it always smart to buy points (mortgage)?

Post by tomwood » Sat Feb 01, 2020 3:58 pm

chevca wrote:
Sat Feb 01, 2020 12:23 pm
Don't buy points and pay ahead on the mortgage on your own, if you want to do that (save interest).
Doesn't prepaying go towards the principal?
Or am I not understanding some trick about paying less interest based on the date a mortgage payment is auto deducted from my account?

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tomwood
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Re: Is it always smart to buy points (mortgage)?

Post by tomwood » Sat Feb 01, 2020 3:59 pm

dukeblue219 wrote:
Sat Feb 01, 2020 2:04 pm
But if someone used to be itemizing mortgage interest and no longer is with the high standard deduction, prepaying a bunch of interest and deducting it all at once is a little more appealing now.
If I take the standard deduction and no longer deduct mortgage interest, does that mean I likely won’t be able to deduct the points either?

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Re: Is it always smart to buy points (mortgage)?

Post by tomwood » Sat Feb 01, 2020 4:04 pm

Big Dog wrote:
Sat Feb 01, 2020 12:17 pm
The short answer is, of course, it is not "always" smart to do anything. As most folks move in ~8 years, it may or may not make sense. Even if you think its your 'forever' home, life happens. Jobs change. Even if you love the company you work for, new management in the future may not love you. What if ~15 years into your mortgage you receive a couple of nice bonuses and decide to pay it off completely?

Personally, I'm not into points. I'd rather keep better options for a so-called 'no-cost refi' in the future.
If the breakeven point is 6 years and the average person stays in the home for 8, doesn't that mean more than 50% of home buyers would have been better off buying points? What have I missed?

I’ve never refinanced, why do you say it’s a ‘so called’ no cost refi? And what is it about a refi that’s better than buying points? I haven’t ever done either so any education would be helpful, no matter how elementary.

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Re: Is it always smart to buy points (mortgage)?

Post by Big Dog » Sat Feb 01, 2020 4:28 pm

^^folks move on average in 8 years, but due to refis/payoffs, et al, the average mortgage length is shorter.

A 'no-cost' refi is when you put up no money at the close. (the fees are usually rolled into a higher rate.) But the power of a no-cost refi is that you can do one as often as you like as long as rates are dropping. If rates drop a lot, then a refi is great, but then you've lost the earlier value in pre-paying points. Of course, if rates start to climb, then prepaying points can work out.

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Re: Is it always smart to buy points (mortgage)?

Post by chevca » Sat Feb 01, 2020 4:29 pm

tomwood wrote:
Sat Feb 01, 2020 3:58 pm
chevca wrote:
Sat Feb 01, 2020 12:23 pm
Don't buy points and pay ahead on the mortgage on your own, if you want to do that (save interest).
Doesn't prepaying go towards the principal?
Or am I not understanding some trick about paying less interest based on the date a mortgage payment is auto deducted from my account?
Yes, it does.

But, you buy points to have a lower interest rate = X amount less total interest over the loan. Or, take the regular loan/no points and pay some extra towards the principal right away = x amount less total interest over the loan. Six of one, half dozen of the other.

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Re: Is it always smart to buy points (mortgage)?

Post by 02nz » Sat Feb 01, 2020 4:43 pm

I would say that it's usually NOT smart to buy points. The obvious reason is that circumstances change (leading to a move) more than people expect. The second is that it's not just a question of whether you might move before the breakeven point, but whether you might be able to refinance to a lower interest rate. If you are able to refinance even to a slightly lower interest rate at any point before the breakeven point on buying points, then it will be a loss to buy the points.

This is especially true now with zero-closing-cost loans, which carry a slightly higher rate but make it possible to refinance without figuring out whether closing costs will pay off, making it much more favorable to refinance any time rates drop (as long as you're refinancing to a lower rate, of course). I did this twice within a year or so in the early 2010s as rates were dropping. Had I paid points up front, nearly all of that money would've been sunk.

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Re: Is it always smart to buy points (mortgage)?

Post by unclescrooge » Sat Feb 01, 2020 5:11 pm

tomwood wrote:
Sat Feb 01, 2020 12:05 pm
It appears to be simple math which can calculate the breakeven point on calculating if it’s smart or not to buy points. It appears the breakeven point is 5-6 years depending on how many points (and maybe cost of the house). While the future is unknown and it could backfire, would it always be smart to buy points if you expect to live in the house for 10+ years? Do most people buy points? It also only 1% of the mortgage so that amount used as a downpayment won’t offer much help and if someone moves or refinance within 3-4 years, it’s only a small loss for possibly a huge reward if the house is kept the life of a 30 year mortgage.
Why not buy points?
Historically, I has rarely made sense.

Over the past 35 years, interest rates have dropped and so a no cost refinance into a lower rate every few years had been possible.

Now that rates are rock bottom, it's unclear this strategy will continue.

My choice is to continue to choose 7 year adjustable rate mortgages and refi every few years.

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Re: Is it always smart to buy points (mortgage)?

Post by TropikThunder » Sat Feb 01, 2020 6:22 pm

tomwood wrote:
Sat Feb 01, 2020 3:58 pm
chevca wrote:
Sat Feb 01, 2020 12:23 pm
Don't buy points and pay ahead on the mortgage on your own, if you want to do that (save interest).
Doesn't prepaying go towards the principal?
Or am I not understanding some trick about paying less interest based on the date a mortgage payment is auto deducted from my account?
Chevca means pay extra principal (whether monthly or in lump sums), not pay on an earlier date in the month. Each $1 you pay in additional principal saves $1-2 in interest over the loan since each month will have a smaller outstanding balance than the amortization table would imply and you will end up paying it off early. Same concept behind taking out a 30 year mortgage but paying it off in 15 years.
-------------------------------------------------------------------------------------------------
tomwood wrote:
Sat Feb 01, 2020 3:59 pm
dukeblue219 wrote:
Sat Feb 01, 2020 2:04 pm
But if someone used to be itemizing mortgage interest and no longer is with the high standard deduction, prepaying a bunch of interest and deducting it all at once is a little more appealing now.
If I take the standard deduction and no longer deduct mortgage interest, does that mean I likely won’t be able to deduct the points either?
Not just "likely", you absolutely can't. Mortgage points are listed along with interest on Schedule A if you are itemizing (in fact as I mentioned above the line item on Schedule A is “home mortgage interest and points”) and they are usually listed on the 1098 the lender sends you. If you don't itemize, you can't deduct the points.
-------------------------------------------------------------------------------------------------
tomwood wrote:
Sat Feb 01, 2020 4:04 pm
Big Dog wrote:
Sat Feb 01, 2020 12:17 pm
The short answer is, of course, it is not "always" smart to do anything. As most folks move in ~8 years, it may or may not make sense. Even if you think its your 'forever' home, life happens. Jobs change. Even if you love the company you work for, new management in the future may not love you. What if ~15 years into your mortgage you receive a couple of nice bonuses and decide to pay it off completely?

Personally, I'm not into points. I'd rather keep better options for a so-called 'no-cost refi' in the future.
If the breakeven point is 6 years and the average person stays in the home for 8, doesn't that mean more than 50% of home buyers would have been better off buying points? What have I missed?

I’ve never refinanced, why do you say it’s a ‘so called’ no cost refi? And what is it about a refi that’s better than buying points? I haven’t ever done either so any education would be helpful, no matter how elementary.
When you get quotes on a mortgage, the normal presentation is a variety of interest rates and a variety of closing costs. The rates will have the same itemized costs like appraisal, recording fee, title insurance, etc. but the "total closing cost" will vary based on whether they are giving you a credit or charging you points. The lower the rate you want, the more points you will pay. Alternatively, the higher the rate you'll accept, the larger credit they will give you. So a "no cost refi" means you're not paying any closing costs because you accepted a high enough rate that the lender credit offsets the fees.

Note I'm not talking about pre-paid costs like daily interest, property taxes, insurance and escrow. Lender credits won't offset those, so even for a "no cost" refi you're still bringing money to closing but at least some of that will be recouped when you get a refund from your existing escrow account.

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Re: Is it always smart to buy points (mortgage)?

Post by dukeblue219 » Sat Feb 01, 2020 7:03 pm

tomwood wrote:
Sat Feb 01, 2020 3:59 pm
dukeblue219 wrote:
Sat Feb 01, 2020 2:04 pm
But if someone used to be itemizing mortgage interest and no longer is with the high standard deduction, prepaying a bunch of interest and deducting it all at once is a little more appealing now.
If I take the standard deduction and no longer deduct mortgage interest, does that mean I likely won’t be able to deduct the points either?
Well yeah that's true. But buying $10k worth of points might out you over the threshold to itemize for that year.

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Re: Is it always smart to buy points (mortgage)?

Post by Admiral » Sun Feb 02, 2020 8:07 am

When I refinanced in 2016 I was at 4%, 30 year loan. I had the choice of 15 year @ 2.75%, or 2.25% with points. (I think there was also a 2.5% option IIRC). I think it was a few grand, and I paid the points because I knew I would be in this house forever, but I rolled them into the loan. While it's true that you're then paying interest on them, the loan rate was so low that there was no point in using my cash since I could beat the loan rate by leaving the money invested. Half a percent over 15 years adds up.

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Re: Is it always smart to buy points (mortgage)?

Post by clammyhands » Thu Feb 06, 2020 8:17 pm

We just refinanced from a 30 year fixed at 4.375% to a 3.125% 30 year fixed. To us it made sense to buy down the rate with points. We don't foresee moving any time soon (starting a family in a nearly brand new house). While no one can be sure, I also don't foresee rates getting much lower than this. Maybe it could happen. It also made sense to us to roll the points and closing costs into the mortgage. I'd rather have cheap debt and invest the cash into the market.

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Re: Is it always smart to buy points (mortgage)?

Post by Pierre Delecto » Thu Feb 06, 2020 8:22 pm

tomwood wrote:
Sat Feb 01, 2020 12:05 pm
It appears to be simple math which can calculate the breakeven point on calculating if it’s smart or not to buy points. It appears the breakeven point is 5-6 years depending on how many points (and maybe cost of the house). While the future is unknown and it could backfire, would it always be smart to buy points if you expect to live in the house for 10+ years? Do most people buy points? It also only 1% of the mortgage so that amount used as a downpayment won’t offer much help and if someone moves or refinance within 3-4 years, it’s only a small loss for possibly a huge reward if the house is kept the life of a 30 year mortgage.
Why not buy points?
I paid almost two discount points to buy my rate down. The return on the money was fantastic over the medium-longterm. But if you think rates may float down more you might regret paying for what you could have had for free. And of course if you move much sooner than anticipated ... as the bank is gambling on.

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Re: Is it always smart to buy points (mortgage)?

Post by 1130Super » Thu Feb 06, 2020 9:35 pm

Does 5-6 year payback include lost time value of $$. I would think putting extra down for what you would pay for points would have a better return. This could push that break even point 7-10 years

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Re: Is it always smart to buy points (mortgage)?

Post by clammyhands » Fri Feb 07, 2020 7:16 am

That's why I think it's beneficial to roll the points into the mortgage. You can still invest the cash into the market and hopefully yield a better return (> 3.125% in my case).

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Re: Is it always smart to buy points (mortgage)?

Post by Luke Duke » Fri Feb 07, 2020 9:42 am

I've bought points before, but the payback was 2-3 yrs IIRC.

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Re: Is it always smart to buy points (mortgage)?

Post by tomwood » Sun Mar 01, 2020 8:49 am

1130Super wrote:
Thu Feb 06, 2020 9:35 pm
Does 5-6 year payback include lost time value of $$. I would think putting extra down for what you would pay for points would have a better return. This could push that break even point 7-10 years
Great point. I wish I knew the answer

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Re: Is it always smart to buy points (mortgage)?

Post by james3547 » Sun Mar 01, 2020 9:21 am

I just closed in a new mortgage 30 days ago on a new house. I took the 30 year because the spread was only .5 points for the 15 year. Looking at lender fi I can buy 2 points for 8k on a 15 yr and get a 2.25 rate.

The breakeven is 28 months, longer than I would want but a 2.25 rate is, my eyes, unbelievable. Not sure I will do it my mortgage hasn't even been resold yet but I'm thinking about it.

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Re: Is it always smart to buy points (mortgage)?

Post by Admiral » Sun Mar 01, 2020 9:22 am

james3547 wrote:
Sun Mar 01, 2020 9:21 am
I just closed in a new mortgage 30 days ago on a new house. I took the 30 year because the spread was only .5 points for the 15 year. Looking at lender fi I can buy 2 points for 8k on a 15 yr and get a 2.25 rate.

The breakeven is 28 months, longer than I would want but a 2.25 rate is, my eyes, unbelievable. Not sure I will do it my mortgage hasn't even been resold yet but I'm thinking about it.
Did that. 2.25% , 15 year, with a couple points at the time. 2016.

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Re: Is it always smart to buy points (mortgage)?

Post by james3547 » Sun Mar 01, 2020 9:33 am

Would you do that in my shoes? I mean last year or two your savings account was paying more than that.

Anybody know if I need to wait to see who bought my loan before a refi?

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Re: Is it always smart to buy points (mortgage)?

Post by Admiral » Sun Mar 01, 2020 9:39 am

james3547 wrote:
Sun Mar 01, 2020 9:33 am
Would you do that in my shoes? I mean last year or two your savings account was paying more than that.

Anybody know if I need to wait to see who bought my loan before a refi?
Buy the shortest mortgage you can afford that still leaves you with adequate liquidity. If this is a long-term home and the other factors are accounted for: yes.

Can't answer the other question.

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Re: Is it always smart to buy points (mortgage)?

Post by mervinj7 » Sun Mar 01, 2020 11:19 am

tomwood wrote:
Sat Feb 01, 2020 4:04 pm
Big Dog wrote:
Sat Feb 01, 2020 12:17 pm
The short answer is, of course, it is not "always" smart to do anything. As most folks move in ~8 years, it may or may not make sense. Even if you think its your 'forever' home, life happens. Jobs change. Even if you love the company you work for, new management in the future may not love you. What if ~15 years into your mortgage you receive a couple of nice bonuses and decide to pay it off completely?

Personally, I'm not into points. I'd rather keep better options for a so-called 'no-cost refi' in the future.
If the breakeven point is 6 years and the average person stays in the home for 8, doesn't that mean more than 50% of home buyers would have been better off buying points? What have I missed?

I’ve never refinanced, why do you say it’s a ‘so called’ no cost refi? And what is it about a refi that’s better than buying points? I haven’t ever done either so any education would be helpful, no matter how elementary.
I never buy points. I brought my house two years ago and I had the choice to buy points to lower the rate. I think the breakeven was seven years. Now, I am doing a no cost refi after just two years. If rates drop further, then I'll refi again. In all the above examples of folks buying points, did anybody win out in the last decade? Of course, it didn't work out in an era of falling rates but maybe it will be different in the next decade. In either case, it's by no means always the right choice to buy points.

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Re: Is it always smart to buy points (mortgage)?

Post by Admiral » Sun Mar 01, 2020 11:45 am

mervinj7 wrote:
Sun Mar 01, 2020 11:19 am
tomwood wrote:
Sat Feb 01, 2020 4:04 pm
Big Dog wrote:
Sat Feb 01, 2020 12:17 pm
The short answer is, of course, it is not "always" smart to do anything. As most folks move in ~8 years, it may or may not make sense. Even if you think its your 'forever' home, life happens. Jobs change. Even if you love the company you work for, new management in the future may not love you. What if ~15 years into your mortgage you receive a couple of nice bonuses and decide to pay it off completely?

Personally, I'm not into points. I'd rather keep better options for a so-called 'no-cost refi' in the future.
If the breakeven point is 6 years and the average person stays in the home for 8, doesn't that mean more than 50% of home buyers would have been better off buying points? What have I missed?

I’ve never refinanced, why do you say it’s a ‘so called’ no cost refi? And what is it about a refi that’s better than buying points? I haven’t ever done either so any education would be helpful, no matter how elementary.
I never buy points. I brought my house two years ago and I had the choice to buy points to lower the rate. I think the breakeven was seven years. Now, I am doing a no cost refi after just two years. If rates drop further, then I'll refi again. In all the above examples of folks buying points, did anybody win out in the last decade? Of course, it didn't work out in an era of falling rates but maybe it will be different in the next decade. In either case, it's by no means always the right choice to buy points.
Clearly it's not ALWAYS better. I can tell you it has worked for me. I had a choice of 2.5 or 2.25%. The difference in payback was 34 months. I rolled most of the cost into the loan. I did this for a number of reasons, the main one being that I could make more money (even in bonds) that the loan was costing me, so there was no point in paying for the points up front.

Second, I knew I would be in this home through retirement.

Third, I was coming from a 30yr-4% loan so the interest savings was already so large that any premium I was paying for the rate essentially disappeared within the first few months because I was saving over $750/mo in interest. Finally, I was pretty confident that, at 2.25%, I would never refinance again. Would I if rates hit 1%? Maybe. But I now have 11 years remaining, so it would have to be for a much shorter term, as there's a point of diminishing returns when the interest you're paying is so low. And at such low rates, pre-payment also becomes pointless.

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Re: Is it always smart to buy points (mortgage)?

Post by DVMResident » Sun Mar 01, 2020 2:06 pm

I generally dislike paying points unless you *know* that you’re going to keep the note for the long term. Most people don’t have this level of predictability.

IMO a better option is to respond to the market as it develops. If rates drop, refi. If rates rise, buying those higher yielding fixed assets and keep them as collateral against the mortgage. If rates stays flat, you can pay down the mortgage as appropriate to your circumstances (after higher interest loans and tax advantages accounts are filled, for example).

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Re: Is it always smart to buy points (mortgage)?

Post by grabiner » Sun Mar 01, 2020 9:41 pm

It's not just a matter of when you move; you might also refinance or pay off the mortgage early.

I paid 2.25 points to reduce the rate on my 15-year mortgage from 3% to 2.625% when I took out my mortgage in 2013. This is a break-even of about 8 years (not 6 because the mortgage balance declines over time). I expected that this would be a good deal because I wouldn't refinance such a low rate, and was confident that I would stay in the home for most of the term.

If the mortgage had been at 3%, I would have paid it off, probably in December 2018, which made taking out the points a loss. At 2.625%, it wasn't worth paying off, or even paying down, given bond rates at the time.

And now I am confirming the loss because I am paying it off.
Wiki David Grabiner

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Re: Is it always smart to buy points (mortgage)?

Post by softwaregeek » Sun Mar 01, 2020 10:04 pm

Big Dog wrote:
Sat Feb 01, 2020 4:28 pm
^^folks move on average in 8 years, but due to refis/payoffs, et al, the average mortgage length is shorter.

A 'no-cost' refi is when you put up no money at the close. (the fees are usually rolled into a higher rate.) But the power of a no-cost refi is that you can do one as often as you like as long as rates are dropping. If rates drop a lot, then a refi is great, but then you've lost the earlier value in pre-paying points. Of course, if rates start to climb, then prepaying points can work out.
I have done this six times.

House 1 started 5 percent. Ended 3.375.
House 2 started 3.875 percent, then 3.25, now locked at 3.0

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Re: Is it always smart to buy points (mortgage)?

Post by BrandonBogle » Wed Apr 29, 2020 8:41 pm

I'm facing this dilemma myself. I refi'd my purchase mortgage at 6 years and now I am refi'ing again 3 years later. That said, I'm tempted by the points as they are "cheap" and wondering if rates would really get low enough to make it worthwhile to refi again.

My options are:

Code: Select all

Rate     Points   Breakeven   Cash to close
------   ------   ---------   -------------
3.00%    0                   -$1,351 (credit to me)
2.875%   0.48%    51 months  -$  700 (credit to me)
2.75%    0.85%    45 months  -$  203 (credit to me)
2.625%   1.23%    43 months   $  303
2.5%     1.74%    46 months   $  996
So while I've always done 0 points, the rate reduction compared to points paid seems to be decently favorable. That said, I know people in March were doing 15 year at 2.5% (even saw one get 2.375%) at close to $0 cash to close b/c of lender credits or 0 points + low fees. So it was only a month ago that rates were lower. But do we feel we would realistically see lower rates with low closing costs?

FYI, this is a 15-year mortgage and the prior two were 30-year.

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TxAg
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Re: Is it always smart to buy points (mortgage)?

Post by TxAg » Wed Apr 29, 2020 8:52 pm

Admiral wrote:
Sun Feb 02, 2020 8:07 am
When I refinanced in 2016 I was at 4%, 30 year loan. I had the choice of 15 year @ 2.75%, or 2.25% with points. (I think there was also a 2.5% option IIRC). I think it was a few grand, and I paid the points because I knew I would be in this house forever, but I rolled them into the loan. While it's true that you're then paying interest on them, the loan rate was so low that there was no point in using my cash since I could beat the loan rate by leaving the money invested. Half a percent over 15 years adds up.
We did the exact same thing in 2016

Lou354
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Re: Is it always smart to buy points (mortgage)?

Post by Lou354 » Wed Apr 29, 2020 9:01 pm

When we bought our first house we bought points. We fully expected to live in that house for forty years, and then one year later I took a job in a different state. So my answer to your question is no, it’s not always smart to buy points.

drk
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Re: Is it always smart to buy points (mortgage)?

Post by drk » Wed Apr 29, 2020 9:09 pm

Seeing this thread pop up always makes me laugh because recent history leads me to believe that it's rarely smart to buy points.

MathWizard
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Re: Is it always smart to buy points (mortgage)?

Post by MathWizard » Wed Apr 29, 2020 9:10 pm

I only bought points once. I refinanced before I hit the breakeven point.

Admiral
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Re: Is it always smart to buy points (mortgage)?

Post by Admiral » Thu Apr 30, 2020 6:10 am

drk wrote:
Wed Apr 29, 2020 9:09 pm
Seeing this thread pop up always makes me laugh because recent history leads me to believe that it's rarely smart to buy points.
When you have a job that's steady, and/or know this home will be your home in retirement (i.e. you won't be moving) and rates are sub-3%--and esp for a 15 year loan--buying points can be wise. The reason is not only that you expect to be in the home beyond the payback period, but also because at some point, your rate is so low that you won't refinance again. For example, I am at 2.25% and have 10 years left on my loan. I've paid 40% of the interest already. For any refinance to make sense, it would have to be a 1 or 1.5% rate, AND a shorter term, like a seven year loan. I would not even do a 1% loan while adding years to the mortgage. Those two things are unlikely to happen.

Admiral
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Re: Is it always smart to buy points (mortgage)?

Post by Admiral » Thu Apr 30, 2020 6:19 am

BrandonBogle wrote:
Wed Apr 29, 2020 8:41 pm
I'm facing this dilemma myself. I refi'd my purchase mortgage at 6 years and now I am refi'ing again 3 years later. That said, I'm tempted by the points as they are "cheap" and wondering if rates would really get low enough to make it worthwhile to refi again.

My options are:

Code: Select all

Rate     Points   Breakeven   Cash to close
------   ------   ---------   -------------
3.00%    0                   -$1,351 (credit to me)
2.875%   0.48%    51 months  -$  700 (credit to me)
2.75%    0.85%    45 months  -$  203 (credit to me)
2.625%   1.23%    43 months   $  303
2.5%     1.74%    46 months   $  996
So while I've always done 0 points, the rate reduction compared to points paid seems to be decently favorable. That said, I know people in March were doing 15 year at 2.5% (even saw one get 2.375%) at close to $0 cash to close b/c of lender credits or 0 points + low fees. So it was only a month ago that rates were lower. But do we feel we would realistically see lower rates with low closing costs?

FYI, this is a 15-year mortgage and the prior two were 30-year.
I would do it. Those are some VERY cheap points. Are you likely to miss the $996 once it's gone? Seems doubtful. Again, assuming you expect to be in the house for a while.

chw
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Re: Is it always smart to buy points (mortgage)?

Post by chw » Thu Apr 30, 2020 6:27 am

Agree that it is simple math to calculate the break even point for points. I would submit however the average lifespan of a mortgage is just 3-4 years- they are refi’d for a lower rate, additional cash out, or paid off due to a move.

No one knows the future (kind of like the stock market), so its a bit of a gamble if you buy points. Generally, I would try to get the lowest cost loan, along with the best rate for those costs for your situation.

Ideally if you qualify for a no points/no closing costs loan, they can work out very well, as you have no sunk cost in the loan, and can simply refi when rates drop about .25% below the current rate. No points/costs to me is a much better deal than paying points up front, along with other costs.

I worked as a mortgage banker for over 35 years for several large banks- the metrics of the points structure is tilted in the lenders favor.

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Re: Is it always smart to buy points (mortgage)?

Post by Admiral » Thu Apr 30, 2020 6:29 am

chw wrote:
Thu Apr 30, 2020 6:27 am
Agree that it is simple math to calculate the break even point for points. I would submit however the average lifespan of a mortgage is just 3-4 years- they are refi’d for a lower rate, additional cash out, or paid off due to a move.

No one knows the future (kind of like the stock market), so its a bit of a gamble if you buy points. Generally, I would try to get the lowest cost loan, along with the best rate for those costs for your situation.

Ideally if you qualify for a no points/no closing costs loan, they can work out very well, as you have no sunk cost in the loan, and can simply refi when rates drop about .25% below the current rate. No points/costs to me is a much better deal than paying points up front, along with other costs.

I worked as a mortgage banker for over 35 years for several large banks- the metrics of the points structure is tilted in the lenders favor.
All true, but no one is "average." It's very situation specific. Also as noted there's a point of diminishing returns for a refi when rates are so low.

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Location: Seattle

Re: Is it always smart to buy points (mortgage)?

Post by drk » Thu Apr 30, 2020 11:24 am

Admiral wrote:
Thu Apr 30, 2020 6:10 am
drk wrote:
Wed Apr 29, 2020 9:09 pm
Seeing this thread pop up always makes me laugh because recent history leads me to believe that it's rarely smart to buy points.
When you have a job that's steady, and/or know this home will be your home in retirement (i.e. you won't be moving) and rates are sub-3%--and esp for a 15 year loan--buying points can be wise. The reason is not only that you expect to be in the home beyond the payback period, but also because at some point, your rate is so low that you won't refinance again. For example, I am at 2.25% and have 10 years left on my loan. I've paid 40% of the interest already. For any refinance to make sense, it would have to be a 1 or 1.5% rate, AND a shorter term, like a seven year loan. I would not even do a 1% loan while adding years to the mortgage. Those two things are unlikely to happen.
Hence that "rarely" instead of "never."

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dodecahedron
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Re: Is it always smart to buy points (mortgage)?

Post by dodecahedron » Thu Apr 30, 2020 11:29 am

TropikThunder wrote:
Sat Feb 01, 2020 1:55 pm
fyre4ce wrote:
Sat Feb 01, 2020 12:25 pm
Numbers are even higher now, given that points are probably deductible but mortgage interest may not be (TCJA).
Points aren’t a separate deductible expense, they are lumped in with the interest (“home mortgage interest and points”). Logical since points are basically pre-paid interest. If you’re over the debt limit, the deductibility of points is reduced same as the regular interest is.
Points are only deductible in full if the mortgage is for the original purchase (or improvement) of your home.

If you pay points on a refinance, you can´t deduct them in full in the year you actually paid the points, you need to amortize the deduction for the points over the life of the mortgage.

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