Is paying mortgage points a good idea or a bad idea? Many loans have no points,
so you do have the option of not paying. Of course, you’ll pay higher interest on such loans, so how do you determine which option is the smart choice?
First, what is a point? It’s another way for a lender to make money – another loan fee. They are sometimes called discount points – you pay them to get a discounted interest rate on your loan. It is also said that you are “buying down” the interest rate by paying points. But the simplest definition is that a point is one percent of the loan amount. Therefore, for example, two points on a $200,000 loan would be two percent
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Pay Points Or Not?
To some extent, whether you should pay the points depends on your job – or rather on your job, your interests and all the things that predict your future. Points, you see, are paid up front, while your savings from the lower interest rate are spread out into the future. Obviously then, you get more benefit if you own your home longer, or if you don’t refinance for a long time.
Let’s look at an example. Borrow $250,000, without points, at 6% on a 30-year mortgage, and your payment would be $1,499 per month. Pay two points, or $5,000, to get the interest rate down to 5.5%, and your payment on the $255,000 (points are often added on to the loan), would be $1,448 per month. You save $51 per month.
It will take almost eight years to save the $5,000 you paid in points. To calculate this, divide the cost of the points by the monthly savings to determine how many months it takes to pay back the cost. If you plan to keep the mortgage loan for longer than that it can be