For a mortgage, how do you know when to pay points and when not to?

Question

I want to refinance to lower my monthly outgoing - I would have to purchase points to get around the interest rate I currently have or lower. When does it make sense to pay the points and when is it inadvisable?

Answer 1

When to buy points...
In the short term (appx 5yrs), if cash flow is more important than total cost.

In the long term, if you hold the loan longer than 5yrs you begin to save on total cost.

Answer 2

Usually, 1 point is equal to 1/8% interest rate. So if you have a 100,000 mortgage and pay 1 point to get a 6% rate (vs 6 1/8% rate), you would have paid 1,000 upfront to save $10.42 a month. The break even on this is 96 months (8 years). So if you keep the mortgage longer then 8 years, it's better to pay the point. If less then 8 years, the higher rate.

Now, if you can get a rate that is 1/4% lower with one point, then the break even is 4 years. And this is a much better deal.

The other question you need to ask yourself is cash flow. Would you rather have $1000 in the bank or save $10.42 a month?

Also, points are broken out 2 ways. Loan origination fee (this pays the lender) and discount points. When you shop around make sure that the rates are quoted the same. For example. 6% 1+1. This means that the rate is 6% with one point loan origination + one discount point.

If you are quoted a rate like this: 6% with one point. ASK! does this included the loan origination fee. I bet you it will not. Always get rates quoted as: the interest rate AND ____ + _____ points.

You can get 0+0 rates, but usually these are higher. I would always pay the loan origination fee and NOT the discount point.

Answer 3

points generally take between 3 and 7 years until you see the full benefit of the lower payment repaying back the initial costs. but on a refi, since you are rolling the costs of the points into the loan, it may take a little longer until you reach that "break even" point. (4-8 years). but, if you are looking to stay in the home and keep the mortgage, points would be worthwhile.

Answer 4

You would want to figure out how long it would take you to break even from the points.

The lender may have a built in program to tell you this. My software has an Analyze button, and if I click on it I'll see if the loan saves the customer any money on a monthly basis, if it saves money over the long haul and if there are points, how long it takes to break even.

I'm sure I knew how to figure it out manually at one time, but not anymore.

Answer 5

This is very simple, compare the APR of your existing loan and the one your applying for -the one that has a lower APR is the better one.APR (Annualized Percentage Rate) is the real measure ,not the interest rate. Unfortunately loan officers do not educate their customers about this.Ultimately what makes sense is how much of your principal balance you are reducing at the end of the day -so please compare the APR it aggregates the points paid and the embedded interest rate

Answer 6

It's always advisable to pay points, if you don't then you would most definitelly pay a very high rate. At my company, you don't have to pay the points upfront and the origination fee is waived for those that qualify.

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First Capital Mortgage
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Answer 7

Carefully consider how long you plan to live in your new home. The longer you will stay the more benefit you will get out of paying points. If you plan to pay off the loan, move or refinance within the first five years, it is generally not a good idea to pay points.

Answer 8

right now isnt a good time to buy points.

if the rates drop then you just basically lost your money.

the best time to pay points is when the rates are really low....

paying an origination is different from paying a discount point