As mortgage rates fall, points can sweeten the deal

Posted by  on Nov 24, 2014

Mortgage rates eased downward last week, according to HSH.com. By November 21, the average for the 30-year fixed-rate mortgage (FRM) stood at 4.08 percent, down 2 basis points from 4.06 percent seven days earlier. Points held steady at 0.13. There have been only three weeks since the end of May 2013 that this rate has been lower.

On the same day, the average rate for the 15-year FRM was 3.37 percent. That too was a fall of 2 basis points (from 3.39 percent), and its points also remained steady, at 0.10. The 1/1 30-year adjustable-rate mortgage (ARM) had an average rate of 2.54 percent, down (you guessed it) 2 basis points from 2.56 percent. To add a little variation, points for these fell to 0.12 from 0.16. Our live database of current mortgage rates can help you find the best mortgage rates in your area.

What is the point?

Unless you are a bit of a mortgage nerd, you likely focused on the rates in those last two paragraphs and pretty much tuned out the points. In fact, you may well have a hazy understanding of what points are. Last week, the J.D. Power 2014 U.S. Primary Mortgage Origination Satisfaction Study revealed that one in three mortgage customers (and 41 percent of first-time buyers) don't fully understand the home-loan process.

And yet there is a reason responsible reporters never quote a rate without also mentioning the accompanying origination points: The latter can make a real difference in how good an overall deal is.

Two points

The good news is, these origination points are easy to understand and calculate. They are the fees lenders or loan officers charge for the work they do in setting up a home loan or mortgage refinance and are a straight percentage of the total loan amount. They are usually paid on closing and can be rolled up into the loan. Unfortunately, they are not tax deductible.

There is another sort of mortgage point that are entirely voluntary and allow you to buy a lower interest rate (and so they lower your monthly payments) by paying extra up front. Typically, each discount point (which should cost you 1 percent of the value of the loan) you purchase is going to reduce the mortgage rate you pay by somewhere between one-eighth (0.125 percentage points) and one quarter (0.25 percentage points) of 1 percent.

Are discount points worth it? Usually not, though they can be in certain circumstances. You need to use mortgage calculators to model the savings you stand to make each month, and see how long it takes you to recoup the cost of the points -- or, to use the jargon, to reach your "breakeven point." Given how frequently many move home, that may come too late for the purchase of discount points to make economic sense. There may also be better ways to use spare cash to get a lower rate, such as paying down other existing debt or increasing your down payment.

Related articles:

What's the best way to use savings to reduce a mortgage rate?

Should I pay points on a mortgage loan?

6 ways to squeeze refinance rates down


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