Points or No Points
Monday, July 6, 2009 | 1 comment
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.
