Does Paying Points On A Mortgage Make Sense

Does Paying Points On A Mortgage Make Sense



Does Paying Points on​ a​ Mortgage Make Sense?
You've found your dream home and are now ready to​ start shopping for a​ mortgage .​
Several lenders have talked about points .​
You've heard that paying points is​ the​ only way to​ get a​ low interest rate .​
But is​ increasing your initial costs worth getting a​ lower rate?
For most people,​ paying points doesn't make sense .​
Points,​ also called discount points or​ origination fees,​ are each worth one percent of​ the​ loan amount .​
They are paid to​ the​ lender at​ closing.
Paying points basically allows the​ borrower to​ buy down the​ interest rate.
Points became popular in​ the​ early 1980s when mortgage rates were in​ excess of​ 15% .​
Most people could not afford the​ monthly payments that come with such high interest rates .​
Lenders began offering discounted rates at​ a​ certain fee .​
Sellers often paid the​ points in​ order to​ sell their properties .​
This gave buyers affordable mortgages and owners were able to​ sell their homes.
Times are different now .​
Interest rates are reasonable .​
There isn't a​ large need to​ pay a​ lot of​ money up front in​ order to​ get a​ lower rate.
Let's look at​ the​ numbers .​
You have contracted to​ purchase a​ home for $240,​000 .​
You have the​ 20% down,​ which leaves you​ with a​ mortgage of​ $192,​000.
You find a​ 30-year fixed rate mortgage at​ 6.5% with two points .​
For closing,​ you​ will need to​ pay $3,​840 ($192,​000 x 2%) for the​ points.
The lender can also offer you​ a​ rate of​ 7% with no points.
What do you​ choose? the​ lower rate or​ the​ lower closing?
At 6.5% you​ will have a​ monthly principal and interest payment of​ $1,​207 .​
At 7% your payment increases to​ $1,​270 each month .​
That's a​ difference of​ $63 per month .​
If you​ are looking for a​ monthly payment reduction,​ it's not really a​ significant one.
It will take you​ 61 months ($3,​840 divided by $63) to​ recoup your points payment in​ the​ form of​ a​ lower payment .​
This is​ your payback period .​
But if​ you​ had the​ $3,​840 still,​ it​ could be earning interest in​ the​ bank .​
If it​ gets 3% interest in​ the​ bank,​ it​ would earn about $10 per month .​
If you​ pay points,​ this is​ interest lost,​ so subtract $10 from your $63 per month savings .​
Now divide $53 into $3,​840,​ and your payback period increases to​ 72 months -- six years.
So you​ have to​ live in​ your home for at​ least six years in​ order to​ take advantage of​ the​ savings that paying points gives you​ .​
Most people don't keep a​ mortgage for six years .​
Unless you​ are absolutely sure you​ will live in​ the​ home for the​ time period necessary to​ recoup your points,​ you​ should probably invest your money instead of​ putting towards points.
If you​ are looking at​ paying points in​ order to​ reduce your monthly housing payment,​ you​ may want to​ look at​ a​ less expensive property .​
Sixty dollars worth of​ savings isn't a​ lot if​ you​ have a​ tight budget .​
Chances are that if​ you​ have a​ tight budget to​ start with,​ finding extra money for closing would be difficult .​
And don't forget,​ taking out a​ side loan to​ get the​ money to​ pay points with is​ defeating the​ purpose.




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