Paying points or not paying points, that is the question. I found an interesting article yesterday written by Barry Habib from the Mortgage Market Guide, Don’t Pay Points, Please! who urges borrowers not to pay points. Instead, he suggests you invest the money, pay down other debt, or put the money towards a bigger down payment.
What is a point? In short, a point is pre-paid interest. One point equals one percent of the loan amount and each point paid reduces your interest rate, on average, one quarter of one percentage point.
Here is an example:
You want a 30 year fixed rate mortgage $720,000 loan amount. You can obtain a 6.75% interest rate with no points paid or a 6.50% with 1 point paid ($7,200).
- The 6.75% zero point option equates to a $4,669.91 monthly principal and interest payment.
- The 6.5% one point option equates to a $4,550.89 monthly principal and interest payment.
By paying $7,200 in points upfront, you save $119.02 per month. Take a look at these scenarios to see how long it will take to recoup that money.
When deciding whether or not to pay points ask yourself, how is paying points going to affect my personal and financial goals? Points can work for the right person, at the right time, for the right reason. When you sit down with your Mortgage Advisor, make sure they show you when the points will pay for themselves and how it will fit into your total mortgage plan. As we all know, there is nothing worse than getting caught with your “points” down!
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