Home-Buying Advice - Mortgage Points

This post isn't intended for a deal right now, unless you're looking for a home or refinancing a mortgage today. But I wanted to give a tip just for you to keep in mind when you might get to the point of buying a house.

Think twice before taking points on your mortgage. When we bought this house, our financial guy talked us into adding a point at closing to get a quarter-percent better rate on our mortgage. If you ran the numbers, it seemed like a decent idea, as the amount we paid would get balanced out after a few years by the lower payments we made. The presumption backing that up was simply the idea that we would own the house for that length of time.

What he neglected to mention (and we didn't have the acumen to consider) was the chance that we might refinance our mortgage. Within about a year, rates had dropped enough that the chance to get a lower rate was fairly straightforward. They had dropped lower than the rate we had gotten even with the point. We went ahead with a refinance, so we created a new mortgage. The new rate had nothing to do with the old rate, it was an entirely new transaction. So the points we paid the first time had no influence on our new mortgage.

This meant that we had paid 1% of the cost of the house for about a year's worth of lower interest, so we definitely didn't get as much benefit as we paid out. That taught me that when there are various ways circumstances may change, paying money upfront for something that won't balance out over many years is something to avoid. With the refinancing we didn't pay points (we actually refinanced a few times as rates kept going lower) -- thank goodness we only made the points mistake the first time and didn't repeat it.

At least we didn't initially go for an even bigger interest rate reduction and pay 3 points! That would've really been a lot of money down the tubes.

So my advice is to avoid paying the points, keep the money in your pocket, because you very well might not have that same mortgage for long enough to get the benefit that equals the balance.