Mortgages & Creative Financing

Investors, Should You Be Paying Mortgage Points?

Expertise: Mortgages & Creative Financing
21 Articles Written
mortgage-points

Mortgage points, known as discount points or “buying down the rate,” are fees paid at closing to a lender to reduce the interest rate and lower your monthly mortgage payment. Generally, one point costs 1 percent of your mortgage amount. The more points you buy, the lower the rate on your loan and the lower your payment. 

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And what investor doesn’t like having lower expenses and more cash in their pocket? 

Know When to Pay Points

In theory, the longer you plan to own the property, paying more points up front helps you save on interest over the life of the loan. Conversely, paying upfront points is expensive and slows your velocity of money.  

Let me explain.

Let’s say you purchase a $125,000 property, with 20 percent down, on a fixed rate 30-year mortgage. Here is how your costs, savings, and opportunity costs would look for buying down one and two points.

In both rate buydown scenarios, the savings at the 10-year and 30-year mark is nothing to sneeze at. If the property was your primary home, you would consider the savings involved especially if the loan amount was larger.  

However, this home is not our primary, rather an investment property and the debt is outsourced to the tenant. So, let’s look at the opportunity cost of paying this upfront fee.

Related: How to Land the Best Possible Mortgage Rates

As long as the property cash flows well (if it doesn’t, let’s have a convo on why you are buying it!), you would actually make a better return investing the money you would use to buy down the rate. In this case, investing the fee to buy down the rate at 8 percent compounded annually would yield multiples over your savings (and you could certainly do better than an 8 percent return). 

Decide What’s Right for You

calculate-financials

To reach a decision about paying points to lower your mortgage rate on your investment property, do the following.

  1. Calculate the cost of buying down the rate
  2. Calculate the principal and interest payment for the respective APRs
  3. Do the math (see above) to calculate how many months it takes you to break even 
    • Fees cost / Monthly savings = Number of months to break even
  4. Calculate your opportunity cost between paying the fee cost and investing the fee cost

There are additional considerations to paying points:

  • If you use FHA financing, buying down the rate doesn’t get you out of carrying primary mortgage insurance. Run the numbers both ways to understand which is better—buying down the rate or the PMI
  • If you use adjustable rate financing, buying down the rate generally only applies to the loan’s interest rate in the loan’s fixed-rate period. (Therefore, it doesn’t do much good when the rate starts to adjust.)

Related: 4 Popular Mortgage Programs for First-Time Home Buyers

Conclusion

In the end, under certain circumstances‚ paying points on your loan could save you money if you plan to own the property past the break-even point and are in a fixed-rate mortgage. However, a savvy investor will always ask what the opportunity cost of spending the fees upfront to buy down the interest rate and what return on investment you could you generate in the future.

Do you pay mortgage points—why or why not?

Share with a comment below!

Whitney is a real estate investor and personal finance trainer whose vision is to launch 10,000 families on the path toward financial independence. After purchasing her first rental in 2002, and hi...
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    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 2 months ago
    Hi All, It appears the tables are not formatted well on the web version and completely eliminated on the mobile version. For your ease, here is a link to a PDF of the tables for the scenario. Happy investing! https://drive.google.com/file/d/1NluTew-7Fo1KTSKWYINhCe5c_N0T047i/view?usp=sharing
    Michael P. Lindekugel Real Estate Broker from Seattle, WA
    Replied 2 months ago
    the article needs some clarification. discount points are related to buying down the interest rate. points be loan fees not associated with buying down the interest rate. there may be combination of stated points and fees. The important thing to remember is any money paid up front for obtaining a loan is pre paid interest. this does not include money going to third parties such as appraisals or title insurance. any money to the lender up front is pre paid interest. that money can have many different labels - points, underwriting fee, loan fee, document fee, etc. it is all pre paid interest. when you are evaluating several loan programs with a mix of interest rates, points, fees then you need to calculate the effective interest rate for each loan program to compare apples to apples. the effective interest rate converts in the points, fees, costs and other non interest rate finance charges into an interest rate. the effective interest is the true cost of borrowing. effective interest rate is a business school term and is same as Internal Rate or Return. the mortgage industry term is annual percentage rate or APR. there are not exactly the same. how APR is calculated is governed by TILA and MDIA. As Whitney pointed out you need to review the effective interest rate or APR as well as the different cash flow scenarios with your expected hold time. be careful with internet calculators. i find many have calculus mistakes. this is the best website for financial calculators. https://www.mtgprofessor.com/home.aspx
    Whitney Hutten Rental Property Investor from Boulder, CO
    Replied 2 months ago
    Thank you, Michael. Agreed! Not all online calculators are created equal :)
    Marshall Martinez Lender from Portland, OR
    Replied about 2 months ago
    Wouldn't the points paid be based on the loan amount ($100,000) rather than the purchase price ($125,000)? One point would cost $1,000 and two at $2,000.