Borrowers Purchase Too Many Points

Borrowers Purchase Too Many Points

 

A new report claims that borrowers tend to purchase too many points when selecting a mortgage — and in the process end up paying more than they would have with no points and a higher interest rate.

 

The study considered 3,785 individual mortgages originated from 1996 to 2003, looking at the points paid, interest rates and loan length.

 

Data showed that, on average, those who buy points are overestimating the amount of time they will hold their loans. They tended to pay off their mortgages about 37.5 months too early for the purchase of points to actually pay off — defaulting, moving or refinancing before hitting a break-even point so the strategy made financial sense.   By purchasing points, borrowers lower the interest rate on the mortgage. One point is equal to 1 percent of the mortgage, charged as prepaid interest. Points that you pay to purchase your primary residence are deductible in the year you pay them on your federal income-tax return; points you pay to refinance must be written off over the life of your mortgage.

 

Only 1.4 percent of borrowers who purchased points held their loans long enough to make it pay off; of those who didn't buy points, only 1.5 percent would have been better off purchasing them, according to the study.   The report also found that borrowers who buy points often don't treat them as costs they can never recover and so are less likely to refinance. When they do refinance, they often do it late, perhaps hoping to compensate for the points paid.

 

Tell us how you feel about paying points when financing a home mortgage?  Do you prefer to pay up front, or go for the slightly higher interest rate?