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Home Mortgages: Does It Ever Make Sense to Pay Points?
Interest rates on home mortgages are often quoted with and
without points. A point equals one percent of the amount you are
financing. This means that on a $150,000 mortgage, one point is
$1500.00 and two points would be $3,000. These points are in
addition to whatever other closing costs you might have.
I checked interest rates today in our state for 30-year
fixed-rate mortgages and found a number of companies offering
mortgages with no points. Here are a few examples (payment and
interest only - no taxes or insurance).
0 Points 5.625 percent interest, $863 per month payment
0 Points, 5.750 percent interest, $875 per month payment
0 Points, 6.250 percent interesxt, $924 per month payment
Now, let's compare these with mortgages requiring points.
1 Point, 5.250 percent interest rate, $826 per month
payment
2 Points 5.0 percent interest rate, $805 per month payment
2 Points, 5.125 percent interest rate, $817 per month
payment
What this makes clear is that there is an inverse ratio
between the number of points charged by the lender and the
interest rate on the mortgage. In other words, the more points
you pay, the less your interest rate will be. This means that
when you pay points you are basically buying down your interest
rate and, thus, your monthly payment. In fact, one point is
usually equal to ¼ percent in the interest rate. So, as you
can see from these charts, paying two points on a 30-year
fixed-rate mortgage could save you as much as $50 a month or $600
a year.
So doesn't it make sense to always pay points?
Not necessarily.
The important thing in deciding whether or not to pay points
is the number of years you intend to stay in that house before
you either refinance or buy another. Do the math and you will see
that the longer you intend to stay in that house, the more sense
it makes to pay points.
Let's go back to that two point example where the interest
rate is an even five percent and the monthy payment $805. If your
best deal in a no-points mortgage is 5.625 percent, yielding a
payment of $863, then paying two points will save you $58 a month
or $696.00 a year.
However, you must remember that on a $150,000 mortgage, two
points equals $3,000. So you would need to say in that house for
almost 4.5 years in order to just break even on the cost of the
points.
So in answer to the question, should you pay points, the
answer is a a strong maybe. If you intend to stay in the same
house for seven or ten years, the answer is probably "yes." If
you believe you will refinance or sell the home in less than four
years, the answer is that you will be money ahead to skip the
points and pay the higher interest rate.
For FREE help with debt and credit, subscribe today to Douglas
Hanna's free email newsletter "8 Simple Steps to Debt Relief" at
http://www.all-in-one-info.com
 MORE RESOURCES updated Thu. February / 09 / 2012
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