One way to lower the rate on your next mortgage is to buy mortgage points. But while buying points might make sense for some investors, for others it may not be the right way to go. The question of whether to buy points for your rental property or not is an important question that every investor should ask. But each investor is different, so the answers are likely to vary.
Although buying points to lower your mortgage rate may sound appealing, it is not always the right approach. Just as there are times when an investor should take advantage of mortgage points, there are other situations where paying mortgage points is simply not helpful. For example, if you plan to keep your rental properties for many years, you are more likely to save more on interest in the long term than what you paid upfront to reduce your mortgage rate. In such a situation, it may not be worth buying points upfront.
Or, if you plan to sell your properties within a relatively short period or would need to reduce your down payment in order to buy points, doing either will likely eliminate any benefit you could have recognized from buying points. This is because if your down payment is less than 20 percent, you may end up paying private mortgage insurance (PMI) which will effectively erase any interest savings. The same thing is true you take out an adjustable-rate mortgage (ARM). With an ARM, if your interest rate will be adjusted within the first five years or so, you likely won’t see enough interest savings to make buying points worth it.