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Should I Pay Points?

Updated: Apr 1, 2019

When fees paid at closing in exchange for a reduced interest rate, they are called points (also known as “discount points”).  If you want to reduce your monthly mortgage payment for the life of the loan, paying points to buy down your rate can be an effective way to do this.


One point is equal to 1% of your mortgage amount (or $1,000 for every $100,000).  Essentially, by paying points you are paying some interest up front in exchange for a lower interest rate.


Buying points will be more beneficial the longer you plan to own the home because you will realize more interest savings over the life of the loan.  To see whether or not points will be right for you, it will help to run the numbers.  Here’s an example:


Based on a 30-year fixed, amortized $300,000 mortgage


Discount Points:                                  

0.00

1.00


Cost of Points:

$0.00

$3,000.00


Interest Rate:

5.25%

5.0%


Principal and Interest Payment:

$1,656.61      

$1,610.46


Breaking Even


It is also important to figure out how long it will take for the upfront cost of the points to equal the savings you get on your monthly payment.  This is called the "break-even period".  In the example above, you’ll see that if you paid $3,000 for one point to lower your interest rate from 5.25% to 5.00% you’d have a monthly payment savings of $46.15 ($1,656.61 - $1,610.46 = $46.15).  To find the break-even point, you’d divide $3,000 (the upfront cost) by $46.15 (the monthly savings), to see how long you’d have to live in your home for it to be worth the upfront cost.  In this example, it would take 65.01 months, or just under 5 ½ years, to get back the initial cost ($3,000 / $46.15 = 65.01).  The upfront cost would save you 553.80 in monthly payments per year or $16,614.00 over the life of the loan.


Is Buying Points Right for You?


There are several things to consider when you are deciding whether paying points makes sense for you.

Can your discount points be financed into the new loan amount to reduce out-of-pocket costs?

What length of time do you plan on staying in your home and keeping your loan?  If you plan on selling your home before the break-even period, paying points may not be a good decision.

What interest rate reduction will you receive for buying points? This can vary widely, depending on the marketplace.


Can you get a tax benefit?  Contact your tax professional to see how buying points would impact your specific tax situation.


If you want to lower your interest rate, and, in turn, lower your monthly payments over the life of your loan, paying points can be a great way to do this.  To learn more about points and determine whether buying down the rate makes sense for your specific situation give us a call today. We’d be happy to help.


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