Mortgage Lowdown

A low interest and more points on your mortgage may not be such a good thing, according to a new study by Abdullah Yavas, Elliott Professor of Business Administration at Penn State’s Smeal College of Business, and Yan Chang of Freddie Mac. After a detailed perusal of data relating to 3,785 mortgages collected between 1996 and 2003, the duo concluded that those who buy points generally overestimate the time they need to pay back their loans.

The points system works positively for the borrower only when held for a long-enough period, and most of them never do. On an average, they paid off their mortgages 37.5 months earlier than the time when the points would pay off.

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; points you pay to refinance must be written off over the life of your mortgage.

The researchers admit though that this data may be skewed because it was collected during a period of decreasing interest rates and soaring property values, a combination that led to a fair amount of refinancing activity.