Posted 3 years, 9 months ago

Points, also known as “discount points,” are fees paid at closing in exchange for a reduced interest rate.  Paying points to buy down your rate can be an effective way to reduce your monthly mortgage payment for the life of the loan.

One point is equal to 1% of your mortgage amount (or $1,000 for every $100,000).  By paying points, you are essentially paying some interest up front in exchange for a lower interest rate.

The general rule is that the longer you plan to own the home, the more you might benefit from buying points, because you would realize more interest savings over the life of the loan.  When you consider whether points will be right for you, it helps to run the numbers.  Here’s an example:

Based on a 30 year fixed, amortized $300,000 mortgage

Discount Points:                                   0.00 1.00
Cost of Points: $0.00 $3,000.00
Interest Rate: 5.25% 5.0%
Principal and Interest Payment: $1,656.61       $1,610.46


Breaking Even

An important factor to consider is how long it will take for the upfront cost of the points to equal the savings you get on your monthly payment.  This is called the "break-even period".  In the example above, you’ll see that if you paid $3,000 for one point to lower your interest rate from 5.25% to 5.00% you’d have a monthly payment savings of $46.15 ($1,656.61 - $1,610.46 = $46.15).  To find the break-even point, you’d divide $3,000 (the upfront cost) by $46.15 (the monthly savings), to see how long you’d have to live in your home for it to be worth the upfront cost.  In this example, it would take 65.01 months, or just under 5 ½ years, to recoup the initial cost ($3,000 / $46.15 = 65.01).  The upfront cost would save you 553.80 in monthly payments per year or $16,614.00 over the life of the loan.

Is Buying Points Right for You?

There are several factors to consider when deciding whether paying points makes sense.

  • How long do you plan on staying in your home and keeping your loan?  If you plan on selling your home before the break-even period, paying points may not be a good decision.
  • The interest rate reduction you’ll receive for buying points can vary widely, depending on the marketplace.
  • Discount points may be financed into the new loan amount to reduce out-of-pocket costs.
  • Buying points may give you a tax benefit.  Contact your tax professional to see how buying points would impact your specific tax situation.

Paying points can be a great way to lower your rate and, in turn, lower your monthly payments over the life of your loan.  Call us today to learn more about points and determine whether buying down the rate makes sense for your specific situation.

Sincerely,

-The Kavanewsky Team