Financing Mortgage Points - A Good Idea?

There are two types of mortgage points that can be purchased in order to manipulate the cost of your home loan. Origination points are paid for by the borrower and are used to pay the lender or broker for costs associated with processing, evaluating, and accepting your home loan. Discount points are paid for by the borrower and are used to lower the interest rate associated with monthly payments. Although your situation might benefit from purchasing points, sometimes the extra upfront payments are not a monetary reality for you. In this case, you can finance your mortgage points just like you are financing your loan. Your lender will add the cost of the mortgage points to the overall cost of your home loan.

When to Finance Mortgage Points

Your break-even point will determine if you should finance points. Each point is worth one percent of your overall home loan. In this case, the overall value of your home loan is increased by one, two, or three percent, depending on the number of points that you purchase. Each point decreases the monthly interest that you pay by around one quarter. To determine your break-even point, you will need to know the interest rate that you would pay on the loan without the points and the interest rate that you would pay on the loan with the rates. Once you have these two numbers, subtract that amount that you would pay, per month, with the points from the amount that you would pay, per month, without the points. Divide the total amount that you pay for the points upfront by the difference in monthly payments that you determined in the previous operation. If the resulting number occurs within the time that you plan on staying in your home, it is worth your money to finance the points.

When Not to Finance Mortgage Points

When you finance mortgage points, the amount of money that your are borrowing increases. If you plan on paying off the home loan within a short period of time, such as a few months, then financing points is a waste of money. The amount of money that you save through paying a lower monthly interest rate will not equal the amount that you borrowed when you purchased the points. Use the same formula as above to determine your break-even point. If you break-even point occurs after you plan on paying off the loan or after you plan on moving out of your home, do not finance mortgage points  If you have trouble calculating your break-even point, the internet provides many easy to use calculators that will determine the point for you.