Should discount points be paid to lower (buy down) an interest rate?

This question is best answered after careful consideration of your own personal financial goals. Buying down the interest rate (paying points on the mortgage – one point is one percent of your mortgage amount) may not be in your best interest. Here are some reasons why:

Mortgage interest paid is tax deductible in most cases (seek the advice of an accountant or the IRS).

The funds are no longer available to invest, save or use (ie. purchase an IRA, pay off credit card debt at a higher rate, etc.)

Falling interest rates can be taken advantage of sooner if discount points are not paid to buy down the interest rate (the original interest rate was higher).

In the past, if a consumer bought down the interest rate and then refinanced (buying down the rate again), it is possible not enough time will have elapsed to recover the “buy down” amount through the reduced monthly payment. This also occurs if the consumer sells the home before recovering the “buy down” amount.

Not only does the amount paid in discount fees (buy down amount) need to be recovered, the “time value” of the money spent or its “present value” also needs to be recovered. Present value is the income you could have earned or the satisfaction you could have received through alternative use of your money. Remembe to consider the tax consequences of your ultimate decision.

Individuals should do what best fits their own personal situation and goals.

Posted in: Finance Frequently Asked Questions

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