Points or No Points

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What are points anyway? Points are prepaid interest. One point equals one percent of the mortgage amount. One point on a $400,000 mortgage is $4,000. Historically one point will reduce the interest rate by 1/4%.

Many mortgage brokers will advise their clients to pay some points to reduce the interest rate on their loan. Usually they will show that after about 5 years the lower monthly payments will have returned the cash spent on points.

This is partially true, but still not necessarily a good reason to do it. Here are some things to consider:

1. Are you refinancing or getting a loan to buy a home?

  . Points on a purchase loan are tax deductilble that same year.

  . Points on a refinance must be spread over 30 years

2. On average homeowners either sell or refinance every 4.5 years.

  . Therefore you may never reach the 5 year break even date.

  . The 5 year break ignores profit from the points money invested elswhere.

  . Result; Lenders get the points up front and the loan is paid off early.

  . Higher profit per loan for the lender.

3. The points may be better spent on.

  . lowering the loan amount.

  . Paying down a high interest rate credit card.

  . Funding an I.R.A.

  . Etc, etc,etc.

The calculations for these alternatives are pretty simple but beyond the scope of this document.

I do not say that paying points is never a good strategy. It do say that it is rarely the best strategy when compared with with ALL alternative ways to save money when taking a mortagage.

Make sure your mortgage broker demonstrates the results of each alternative available to you based on your unique circumstances and plans.

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