Examining the Pros and Cons of Paying Points

By Keith Loria

One of the more confusing aspects of applying for a mortgage comes when you are asked if you want to pay points on your loan. With so many options out there for loans with no points, you might think that’s it’s crazy to pay “extra,” but in some cases, paying points is the smarter way to go.
In its simplest definition, a point is an additional loan fee that is given to the lender in exchange for a discounted interest rate on your home. It’s called “buying down,” and lets you bring rates to better terms for the life of the mortgage.
“When deciding whether to pay points or not, one needs to ask themselves some key questions,” said Michael Dottmer, a mortgage specialist in Baton Rouge, LA. “How long do you see yourself living in the home? Do you have excess money to pay towards points? Could that money be better used towards something else? Once you get a better understanding of all this, you can decide if points is the way to go.”

The easiest way to show the value of points is by example. If you were to get a loan for $500,000 without points, at 6 percent on a 30-year mortgage, your payment would be $3,000 a month.

“If one was to pay two points ($10,000), the interest rate in this example would go down to 5.5 percent and the monthly payment would be $2,896, so you are saving a little over $100 a month,” Dottmer said. “It would take you about eight years to recoup the money you paid up front, so if you are planning on staying in your home a while, this will save you money in the long-run.”

Some bankers will tell you that it might be better to invest that $10,000 as you might do better than simply making $100 a month, but in an unsure economic climate, that might not be the best way to go.

“Paying points depends on your career, your interests and all the things that predict your future,” said financial advisor Thomas Watkins of Total Mortgage Services in Milford, CT. “Points are paid up front while your savings will be spread out into the future. Therefore, you get more benefit if you own your home longer, or if you don’t refinance for a long time.”

Watkins offers the following rule of thumb: “If you plan to stay in the house for less than three years, do not pay points. If you plan to stay in the house for more than five years, pay 1 to 2 points. If you plan to stay in the house for between three and five years, it does not make a significant difference whether you pay points or not.”

One other thing of note: Since points are interest-payment related, they are fully deductible on your taxes in the year that you close.

Mortgage points can add up to valuable savings over the course of your loan, but of course, life can throw curveballs at you. Even if you “plan” on staying in your home for 20 years, changes in your career or family life could find you putting your home on the market earlier than you expected.

This article is not intended to be advice. For more information about points or other mortgage- or homeownership-related questions, contact our office today.

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