No-cost mortgages are popular with home buyers who are trying to scrape together enough cash to buy a home. Now that the cost of mortgage money is rising, it makes sense to re-evaluate this financing strategy.

To say that a mortgage has no costs is a bit of a misnomer. The borrower pays few if any upfront fees to originate a no-cost mortgage. But the upfront fees, like points, are added to the cost of the mortgage. The cost is reflected in a higher interest rate.

“Points” is a term lenders use for the mortgage origination fee. One point is equal to 1 percent of the mortgage amount. So, if you pay one point to originate a mortgage for $500,000, you will pay $5,000 cash to the lender at closing.

There is an inverse relationship between points and the mortgage interest rate. The more points you pay, the lower the interest rate. One point is roughly equal to a quarter percent on the interest rate. If you were to pay one point, you’d buy the interest rate down 0.25 percent in relationship to a borrower who chooses to pay no points. For a no-point loan, your interest rate will be approximately 0.25 percent higher.

A no-cost mortgage was an attractive option when interest rates on fixed-rate financing were under 6 percent. Now that rates are moving higher, paying points may make more sense, particularly if you’re buying for the long-term.

For example, let’s say you’re trading up to a home that you plan to own 20 years or so until your children are in college. You’re financing the purchase with a $500,000 mortgage.

For one point, the interest rate will be 6 .25 percent with a monthly payment of $3,078.60. The zero-point option will cost 6 .5 percent with a monthly payment of $3,160.35–a difference of $81.75 per month, or $918 per year. If you opt to pay one point, you will need to keep paying on the mortgage for approximately five years and two months to break even when compared to the cost of the no-point mortgage.

HOUSE HUNTING TIP: To arrive at the break-even point when comparing a no-point loan to one with points, divide the points, or $5,000 in this example, by the annual difference in monthly payment, or $918. The result is the length of time in years that you need to keep the loan to make it worthwhile to pay points.

In the above example, there is an advantage to paying points for a lower interest rate if you keep the loan for over five years. The longer you keep the loan, the bigger the savings. In today’s market, buying for the long term is a good strategy.

Paying upfront points also can be advantageous to home buyers who will benefit from a tax deduction. Points paid on a purchase mortgage are tax-deductible in the year of purchase by homeowners who itemize deductions on their federal tax return. Talk to your tax advisor for advice on whether you’ll benefit tax-wise by paying points.

Keep in mind that paying points can be an unnecessary expense for buyers who purchase for the short term. You would also come out ahead with a no-point loan if interest rates were to decline over the next few years. In this case, you could refinance into a lower interest rate mortgage.

THE CLOSING: If you’re short of cash and there are a lot of homes for sale that aren’t moving quickly, you might ask the seller to pay points for you. This strategy will have less chance of success in a market where listings are selling quickly.

Dian Hymer is author of “House Hunting, The Take-Along Workbook for Home Buyers,” and “Starting Out, The Complete Home Buyer’s Guide,” Chronicle Books.

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Thank you for subscribing to Morning Headlines.
Back to top
Keep up-to-date on tools and tactics to impress your clients and outshine your competition with the 2022 virtual bundle.Register Now×
Agent Appreciation Sale: Inman Select for only $85.CLAIM OFFER×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription