Points, to pay or not to pay?
On the first installment we got as far as mutual funds, and got bogged down in the age old debate, NO LOADS vs LOADS this time we will just let that sleeping dog lie, and move on to another topic.
Let’s talk a little about points as it relates to the mortgage industry. Once again you have two camps, the no points no matter what camp, and the, hey it’s okay if it will get me the best rate, camp. And that’s the bottom line isn’t it? We want to know we got the best rate possible for our unique situation, and we want to be sure we are comparing apples to apples.
In the mortgage industry points are used to buy down the base rate on a lender's rate sheet. There will always be the base rate with zero points, then there will be pricing for one point, one and a half, two, two and a half, etc…These tax deductable points are also called discount points.
I cannot tell you how many times I got on the phone with a potential borrower and the first thing they tell me is that they will not pay any points for any reason. I think this attitude comes from the practices of some bad, small lenders who used to charge up to five points on a loan. Think about that for a moment. Your loan amount is five hundred thousand, and you have to pay twenty-five thousand off the top just to get the job done. That’s a hard pill to swallow.
Now take that half a million dollar loan and let’s give it a six percent rate. Your monthly principle and interest payment is going to be $2,997.75. Now let’s pay two points to get that rate down to four and three quarter percent. The cost of points is ten thousand dollars. Your new monthly payment is $2,608.24. That is a savings of $389.51 a month. Over the life of your loan your payment of ten thousand in points is going to save you $140,223.60. If I were to trade you 140k for your 10k payment, how long would you stand there doing the trade? I’d stand there all day. There is a catch though. If you are not going to stay in the house more than two years you may not make back that ten thousand in points, so let’s do the numbers. It is going to take you 25.67 months to pay off the ten thousand you used to pay points. After that it is all savings. If you are going to stay in the home for a year then move, you will waste money. It will take you just over two years to make back that ten grand.
In the scenario we just went over, as long as the borrower is going to stay in the home more than two years, it would seem foolish not to buy down the rate using the discount points. Despite running numerous calculations for borrowers I would still find people so point adverse, that they would not entertain the notion of paying points.
That is really all I have to say regarding points and the mortgage industry. Bottom line, crunch the numbers and you will be able to see if you should be paying points or not. There is no hard fast rule as every loan and every borrower is different. Keep an open mind and do what makes best financial sense.
Good Luck and Happy Financing.
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