Refinance guide mortgage points on a refinance explained

Mortgage Points on a Refinance Explained

When refinancing your mortgage you may see the option to buy mortgage points. Points can reduce your interest rate in exchange for an upfront fee. This guide explains what points are, when they make sense, the benefits and drawbacks, typical costs and fees, a step-by-step how-to, common pitfalls to avoid, and a short FAQ to help you decide whether buying points on a refinance is right for you.

What mortgage points are and when they make sense

Mortgage points (also called discount points) are prepaid interest you purchase at closing to lower the interest rate on the refinanced loan. One point equals 1% of the loan amount. The amount by which your rate drops per point varies by lender and market conditions but commonly ranges from about 0.125% to 0.25% per point on a conventional 30‑year fixed refinance.

Buying points makes sense when:

• You plan to keep the refinanced loan long enough to recoup the upfront cost through the monthly payment savings (the “break‑even” period).
• You have available cash to pay points at closing without depleting emergency savings.
• You want a lower monthly payment and are comfortable paying more upfront for long‑term savings.

Benefits and drawbacks

Benefits

• Lower interest rate and monthly payment for the life of the loan (or until you refinance again).
• Potentially large interest savings over long loan terms.
• Lower interest can improve cash flow and reduce total interest paid.

Drawbacks

• High upfront cost—each point is 1% of the loan amount.
• If you move, refinance, or sell before the break‑even point, you may not recoup the expense.
• Points increase closing costs and may push you above what you can comfortably pay at closing.
• Mortgage points on a refinance are generally amortized for tax deduction purposes (not always fully deductible in the year paid).

Costs and fees to expect

When you buy points, the cost is simple to calculate: 1 point = 1% of the loan amount. But a refinance also includes other closing costs that affect the overall value of the transaction:

• Appraisal fee
• Title search and insurance
• Recording and transfer fees
• Origination fee and administrative fees
• Credit report, flood certification, underwriting fees
• Prepaid items: escrow, interest, mortgage insurance (if applicable)

Be sure to distinguish discount points (buying a lower rate) from origination points (fees charged by the lender to make the loan). Both appear as line items on the Closing Disclosure but have different purposes.

How to evaluate the value: break‑even example

To decide if points make sense, calculate how long it takes to recoup the cost in monthly savings. Example:

• Loan amount: $300,000
• Cost of 1 point: $3,000 (1% of $300,000)
• Rate reduction: 0.25% (e.g., 4.50% → 4.25%)
• Monthly payment drop (approx): $46
• Break‑even: $3,000 ÷ $46 ≈ 65 months (about 5.4 years)

If you expect to keep the loan longer than the break‑even period, buying the point could save money; if you expect to sell or refinance sooner, it may not be worth it.

Step-by-step process for buying points on a refinance

• Shop multiple lenders. Ask each for Loan Estimates showing rate options with and without points.
• Compare APR and monthly payments. APR reflects the effect of points and fees on the cost of credit and helps compare offers.
• Calculate break‑even. Divide the total cost of the points by the monthly savings to find the payback period.
• Decide whether to pay points at closing or roll them into the loan (rolling increases loan balance and may lengthen the break‑even).
• Confirm point details in the Closing Disclosure so you know exactly how much you paid for discount points versus other fees.
• Close the loan and retain records of points paid for tax and resale purposes.

Common pitfalls to avoid

• Not calculating the break‑even period. If you don’t plan to stay in the house past the break‑even point, buying points is often a waste of cash.
• Rolling points into the loan without redoing the math. Financing points means you pay interest on them, which increases the true cost and slows payback.
• Ignoring other closing costs. A lower rate may look attractive, but if overall closing costs are much higher, you might lose the benefit.
• Assuming every point reduces the rate by the same amount. Market conditions, loan program, and lender pricing determine the reduction.
• Overlooking tax rules. Points on a refinance are usually amortized and deductible over the life of the loan, with limited exceptions. Confirm with a tax advisor.

Short FAQ

Q: What’s the difference between discount points and origination points?

A: Discount points are paid to lower the interest rate. Origination points (or fees) are charged by the lender to process the loan. Both appear on closing statements but have different purposes.

Q: Can I finance mortgage points into the new loan?

A: Yes. Lenders often allow you to add the cost of points to the loan balance, but financing points means you’ll pay interest on them and it usually extends the break‑even time.

Q: Are points on a refinance tax deductible?

A: Points on a refinance are generally not fully deductible in the year paid. They are typically amortized (deducted over the life of the loan). There are exceptions—such as when part of the refinance proceeds are used for home improvements—which might allow a different treatment. Check IRS guidance or consult a tax professional for your situation.

Q: How many points should I buy?

A: There’s no one-size-fits-all answer. Use the break‑even calculation, factor in how long you plan to keep the loan, your cash availability, and compare APRs and overall closing costs among lenders before deciding.

Buying mortgage points on a refinance can be a smart move when you plan to stay in the loan long enough to recoup the upfront cost and want lower monthly payments. Run the numbers, compare offers, and factor in tax and cash considerations before you commit.

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