Should you use extra cash to buy mortgage discount points (lowering your rate) or invest that money in the market? This is a common trade-off: guaranteed savings versus expected returns. The right answer depends on your timeline and risk tolerance.
Here is a framework to help you decide between buying points and investing.
The Guaranteed Return of Points
When you buy mortgage points, you get a guaranteed return: lower monthly payments for the life of your loan. A point typically costs 1% of the loan amount and reduces your rate by about 0.25%. The savings are locked in and do not depend on market performance.
The return from points is guaranteed but gradual. It takes several years of lower payments to recoup the upfront cost. If you plan to stay in the home long enough to reach the break-even point, points make sense. If you might sell or refinance sooner, the savings may not justify the cost.
The Expected Return of Investing
Investing the same money in the stock market or other assets offers potentially higher returns but with risk. Historical average returns are around 7% to 10% per year, but there is no guarantee. Your investment could also lose value in a given year.
Investing provides flexibility. You can access the money if needed. But it does not reduce your monthly housing payment. Your mortgage payment stays the same, and you rely on investment growth to make the strategy worthwhile.
How to Decide
Ask yourself these questions:
- How long do you plan to stay in the home? Longer stays favor points.
- Do you need the lower monthly payment to qualify or for cash flow?
- Can you tolerate investment risk, or do you prefer guaranteed savings?
- Is your retirement savings on track? If not, investing may be better long-term.
Bottom Line
Points offer guaranteed savings but take years to break even. Investing offers higher potential returns but with risk. If you plan to stay in the home for more than 5 to 7 years, points may make sense. If you need flexibility, investing might be better.
