Buying down an interest rate

December 22, 2006

A new report suggests that buying down the interest rate on your mortgage may not be the best strategy for borrowers. This study was co-aauthored by Abdullah Yavas, Wlliott Professor of Business Administration at Penn State's Snead College of Business, and Yan Chang of Freddie Mac. The two considered 3,785 individual mortgages originated from 1996 -2003, looking at points paid, interest rate and loan length.

Points paid to purchase a primary residence are deductible on your federal income-tax return in the year they are paid; points paid to refinance must be written off over the life of the mortgage.

The study found that only 1.4 percent of borrowers who purchased points held their loans long enough to make it pay off.

If you are considering paying the points to buy down an interest rate, it would seem wise to do the math. Figure the cost of the points. Figure the change in monthly payment and figure how many months it will take to recoup the cost. An experienced loan officer can give you the information you need to choose the best loan package for your situation.