Study finds buying mortgage points rarely pays off
Associated Press
Published December 22, 2006 at midnight
CHICAGO - A new report claims that borrowers tend to buy too many points when selecting a mortgage - and in the process end up paying more than they would have with no points and a higher interest rate.
The study was co-authored by Abdullah Yavas, Elliott professor of business administration at Penn State's Smeal College of Business, and Yan Chang of Freddie Mac. The two considered 3,785 individual mortgages originated from 1996 to 2003 and looked at points paid, interest rates and loan length.
Data showed that, on average, those who buy points are overestimating the amount of time they will hold their loans. They tended to pay off their mortgages about 37.5 months too early for the purchase of points to actually pay off - defaulting, moving or refinancing before hitting a break-even point.
By purchasing points, borrowers lower the interest rate on the mortgage. One point is equal to 1 percent of the mortgage, charged as prepaid interest. Points that you pay to purchase your primary residence are deductible in the year you pay them on your federal income-tax return; refinancing points must be written off over the life of your mortgage.
"We underestimate the possibility that we may refinance in the near future - or refinance again in the near future - and we underestimate the possibility that we may have to move, either for job relocation or other reasons," Yavas said.
Only 1.4 percent of borrowers who purchased points held their loans long enough to make it pay off; of those who didn't buy points, only 1.5 percent would have been better off purchasing them, the study found.
However, Yavas pointed out that the data cover a time of decreasing interest rates and increasing property values, which led to a lot of refinancing activity.
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