UNIVERSITY PARK, Pa. — The average homebuyer usually purchases an excessive amount of points when selecting a mortgage, which leads to a higher payment than if they would have opted for zero points and a higher interest rate, according to research by Abdullah Yavas, Elliott professor of business administration at Penn State's Smeal College of Business, and Yan Chang, senior economist at Freddie Mac.

Yavas and Chang found that homebuyers that purchased points, on average, tended to pay off their mortgages approximately 37.5 months too early. As a result, the average mortgager with points ended up defaulting, moving, or refinancing more than three years before reaching the break-even point from the purchase of the points.

The study reveals that home buyers are overestimating the amount of time that they will hold their loans and found that only 1.4% of borrowers held their loans long enough to make their decision to buy points pay off. The study found that of the borrowers that did not buy points, 1.5% would have been better served if they had purchased points.

The research also states that points previously paid are often a consideration when making a decision on refinancing; borrowers who are less likely to move or refinance take out mortgages with more points; and tax-related incentives do not appear to play a significant role in points selection.

Titled “Do Borrowers Make Rational Choices on Points and Refinancing?”, the study utilizes data including the points paid, interest rates, and loan length of 3,785 individual mortgages originated from 1996 to 2003.