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 fixed, amortized $300,000 mortgage:
|Cost of Points:||$0.00||$3,000.00|
|Principal and Interest Payment:||$1,656.61||$1,610.46|
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.
There are several factors to consider when deciding whether paying points makes sense.
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.
-The Kavanewsky TeamShare on Twitter Share on Facebook