Should I pay points?

Should I pay points?

This is one of the most often-asked questions I have received over my twenty years in the mortgage business.  And, may answer is always an emphatic MAYBE!  There are a lot of factors to consider.

What are points and why do some people pay them?  Discount Points (typically referred to simply as “points”) are up-front fees borrowers pay at closing to reduce the interest rate for the term of their loan.  Paying one point (1.0% of the loan amount) will usually reduce your interest rate by about 0.25%.  (But, depending on the loan program and the market, it could be as little 0.125% or as much as 0.375% or more.)

Here is an example:

Let’s assume you have a $200,000 mortgage and interest rates with no points are at 4.00% for a 30 year fixed rate mortgage.  By paying one point ($2,000.00) your interest rate would be 3.75%.

Interest Rate	4.0%	3.75%
Principal & Interest Payment	$954.83	$926.23

 By paying the point, you would save $28.60/month on your principal and interest payments (we only consider this portion of your payment because your interest rate and points will not affect the rest of your payment – insurance, taxes, mortgage insurance, etc.).

The first thing you need to calculate is your break-even point – the amount of time it will take you to save enough per month to cover the cost of paying points.  In this case, you would break even in 70 months ($2,000/$28.60 = 69.93 months).

The first consideration would be how long you intend to live in the property.  If you intend to live in the property for less than 5 years, 10 months then the answer is no.  If you intend to live there for more than 70 months, the answer is still, maybe.

There are many reasons why you would not choose to pay points even if you are still going to be living in the home after the break –even point:
     1)      If you are confident that at some point in the next 70 months you will be refinancing your mortgage.  Maybe you are at a high interest rate.  Maybe you intend to take out a construction loan to add an addition to the home.  Maybe you intend to do a cash-out refinance in the future to fund a large purchase or investment.  Again, if you will be living in the property but not have the same mortgage, it does not make sense to pay points.
     2)      If you need the cash.  Especially after purchasing a new home, there are many unexpected expenses that pop up.  Rather than putting a purchase on a high-interest credit card, it may be better to use the money you would have paid in points.
     3)      If you currently have higher-interest debt such as credit cards, it may save you more to use the money you would have paid toward points to pay off or pay down your credit card balances.
     4)      If you would need to take the money out of a savings or investment vehicle that is currently earning a high-rate of return or would require a penalty to withdraw the money, then it might not make sense to pay the points.

Usually, I advise against customers paying points on their mortgage.  Most people are not in their homes for 30 years like they used to be.  And, even if they are, they rarely keep the same mortgage for those 30 years.

Please feel free to contact me at BarkerLoans@gmail.com with any questions you have or to help you with your financing needs.