Last week I had a close friend ask to for me to explain whether or not it would be worth it to them to pay points on his new mortgage loan.  I thought that I would relay the message, that I prepared for him, to you. 

A mortgage discount point is simply prepaid interest.  A point is 1% of the value of the loan.

For example, if you are financing $250,000, one point would be $2,500.

You usually have the option to ”buy” a point or points at the time that you are granted a loan to reduce you interest rate throughout the life of the loan.  The interest rate on your loan is typically reduced by 1/8%, for each point purchased.

For example, you own your home and would like to refinance to get a better rate.  You currently owe $250,000 on your home, so your new loan amount will be $250,000.

You go to your bank and ask the loan officer about current rates.   The loan officer gives these options:

$250,000 @ 5.5% for 30 years, with no points - 

your monthly payment would be about $1420 (plus escrowed taxes and insurance)

-and-

$250,000 @ 5.25% for 30 years, with 2 points ($5000) –

your monthly payment would be about $1380 (plus escrowed taxes and insurance)

As you can see, your monthly savings would be $40, if you choose to “buy”  2 points.   So, what do you do?

You have to think about how long you intend to own the property.

Looking into the future can get a little sticky, because things change and most of the time what you plan does not actually happen, but that is the only way for you to make a good decision.

In order to “buy” 2 points you must spend $5000, on top of the normal mortgage loan closing costs.  

With $40 a month in savings, it will take you 125 months or ten years and 5 months to break even with that expense.

($5000/$40 = 125 months)  Do you intend to own the property for more than 10 years and 5 months? 

 That is the question that you must answer to the best of your ability.  

 

I will give you another example.  You are preparing to buy your first house, for $150,000, you have saved enough money to put 20% or $30,000 down, so you will only be financing $120,000.

Your bank gives you these financing options:

$120,000 @ 5% for 30 years, with no points

your monthly payment would be about $645 (plus escrowed taxes and insurance)

$120,000 @ 4.875% for 30 years, with 1 point ($1200)

your monthly payment would be about $635 (plus escrowed taxes and insurance)

As you can see, the monthly savings is only $10, and will take 10 years to break even ($1200/$10= 120 months).

Again, you must answer the same question- Do you intend to own the property for more than 10 years? 

If you do, after the first 120 months (10 years), you will be saving $10 a month for the remaining 20 years of the loan.

I found a calculator that will quickly help you to make the points versus no-points decision- www.mortgagepoints.com

 

Please let me know if you have any questions!