Not Always a Good Investment

Oct 13, 2025 by vinooalluri.com 81 views

Purchasing Points: Understanding the Disadvantages

When it comes to purchasing points, also known as discount points, it's essential to understand the advantages and disadvantages of this option. In this article, we'll explore which of the following is a disadvantage to purchasing points.

What are Discount Points?

Discount points, also known as mortgage points, are fees paid to the lender at the time of closing to lower the interest rate on a mortgage. These points are usually expressed as a percentage of the loan amount and can be paid upfront or added to the loan balance. The idea behind purchasing points is to reduce the interest rate on the loan, which can lead to lower monthly payments and a lower total interest paid over the life of the loan.

Advantages of Purchasing Points

Before we dive into the disadvantages, let's quickly review the advantages of purchasing points:

Lower Interest Rate: Purchasing points can lead to a lower interest rate on the loan, which can result in lower monthly payments and a lower total interest paid over the life of the loan.
Lower Monthly Payments: With a lower interest rate, the monthly payment on the loan is reduced, making it more manageable for the borrower.
Lower Total Interest Paid: Over the life of the loan, purchasing points can result in lower total interest paid, which can save the borrower thousands of dollars.

Disadvantages of Purchasing Points

Now that we've covered the advantages, let's explore the disadvantages of purchasing points:

Increased Closing Costs: Purchasing points can increase the closing costs on a mortgage, which can be a significant disadvantage for borrowers.
Higher Upfront Costs: Purchasing points requires a higher upfront payment, which can be a burden for borrowers who are already struggling to come up with the down payment.
Not Always a Good Investment: Purchasing points may not always be a good investment, especially if the borrower plans to sell the property or refinance the loan in the near future.

Which of the Following is a Disadvantage to Purchasing Points?

Based on the information above, the correct answer is:

D. Closing costs are increased

Purchasing points can increase the closing costs on a mortgage, which can be a significant disadvantage for borrowers. While the other options may be related to purchasing points, they are not necessarily disadvantages.

Conclusion

Purchasing points can be a complex decision, and it's essential to weigh the advantages and disadvantages before making a decision. While purchasing points can lead to lower interest rates and lower monthly payments, it can also increase closing costs and require a higher upfront payment. By understanding the pros and cons of purchasing points, borrowers can make an informed decision that meets their financial needs.

Frequently Asked Questions

Q: What are discount points? A: Discount points, also known as mortgage points, are fees paid to the lender at the time of closing to lower the interest rate on a mortgage.
Q: What are the advantages of purchasing points? A: The advantages of purchasing points include a lower interest rate, lower monthly payments, and lower total interest paid over the life of the loan.
Q: What are the disadvantages of purchasing points? A: The disadvantages of purchasing points include increased closing costs, higher upfront costs, and not always being a good investment.

Additional Resources

National Association of Realtors: The National Association of Realtors provides information on mortgage points and how they can affect the cost of a mortgage.
Federal Reserve: The Federal Reserve provides information on mortgage points and how they can affect the interest rate on a mortgage.
Mortgage Bankers Association: The Mortgage Bankers Association provides information on mortgage points and how they can affect the cost of a mortgage.
Purchasing Points: A Comprehensive Guide to Frequently Asked Questions

In our previous article, we explored the advantages and disadvantages of purchasing points, also known as discount points. We also discussed how purchasing points can affect the cost of a mortgage and the interest rate on a loan. In this article, we'll answer some of the most frequently asked questions about purchasing points.

Q&A: Purchasing Points

Q: What are discount points, and how do they work?

A: Discount points, also known as mortgage points, are fees paid to the lender at the time of closing to lower the interest rate on a mortgage. These points are usually expressed as a percentage of the loan amount and can be paid upfront or added to the loan balance.

Q: How do discount points affect the interest rate on a mortgage?

A: Discount points can lower the interest rate on a mortgage, which can result in lower monthly payments and a lower total interest paid over the life of the loan. The amount of the discount will depend on the lender and the specific loan terms.

Q: What are the benefits of purchasing points?

A: The benefits of purchasing points include a lower interest rate, lower monthly payments, and lower total interest paid over the life of the loan. Purchasing points can also help borrowers qualify for a larger loan amount or a lower loan-to-value ratio.

Q: What are the drawbacks of purchasing points?

A: The drawbacks of purchasing points include increased closing costs, higher upfront costs, and not always being a good investment. Borrowers should carefully consider their financial situation and the potential benefits and drawbacks before deciding to purchase points.

Q: How much do discount points cost?

A: The cost of discount points varies depending on the lender and the specific loan terms. Typically, one discount point costs 1% of the loan amount, but this can range from 0.5% to 2% or more.

Q: Can I purchase points on a refinance loan?

A: Yes, you can purchase points on a refinance loan. However, the benefits of purchasing points may be less significant on a refinance loan, as the interest rate on the existing loan may already be low.

Q: Can I purchase points on a government-backed loan?

A: Yes, you can purchase points on a government-backed loan, such as an FHA or VA loan. However, the benefits of purchasing points may be less significant on a government-backed loan, as the interest rates on these loans are often lower.

Q: How do I know if purchasing points is right for me?

A: To determine if purchasing points is right for you, consider your financial situation, the interest rate on your loan, and the potential benefits and drawbacks of purchasing points. It's also a good idea to consult with a lender or financial advisor to get personalized advice.

Q: Can I purchase points on a mortgage with a variable interest rate?

A: Yes, you can purchase points on a mortgage with a variable interest rate. However, the benefits of purchasing points may be less significant on a variable interest rate loan, as the interest rate can fluctuate over time.

Q: Can I purchase points on a mortgage with a balloon payment?

A: Yes, you can purchase points on a mortgage with a balloon payment. However, the benefits of purchasing points may be less significant on a balloon payment loan, as the interest rate on the loan may be higher.

Conclusion

Purchasing points can be a complex decision, and it's essential to carefully consider the benefits and drawbacks before making a decision. By understanding the pros and cons of purchasing points, borrowers can make an informed decision that meets their financial needs.

Additional Resources

National Association of Realtors: The National Association of Realtors provides information on mortgage points and how they can affect the cost of a mortgage.
Federal Reserve: The Federal Reserve provides information on mortgage points and how they can affect the interest rate on a mortgage.
Mortgage Bankers Association: The Mortgage Bankers Association provides information on mortgage points and how they can affect the cost of a mortgage.

Frequently Asked Questions

Q: What are discount points? A: Discount points, also known as mortgage points, are fees paid to the lender at the time of closing to lower the interest rate on a mortgage.
Q: How do discount points affect the interest rate on a mortgage? A: Discount points can lower the interest rate on a mortgage, which can result in lower monthly payments and a lower total interest paid over the life of the loan.
Q: What are the benefits of purchasing points? A: The benefits of purchasing points include a lower interest rate, lower monthly payments, and lower total interest paid over the life of the loan.

About the Author

[Your Name] is a financial writer with expertise in mortgage finance and real estate. With years of experience in the industry, [Your Name] has written extensively on topics related to mortgage points, interest rates, and real estate finance.