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Should You Pay Points on a Mortgage Loan?

Points are paid when getting a mortgage in order to get a lower interest rate for the life of the loan.  While lower rates and mortgage payments are desirable, the only way to know if paying points is going to be beneficial is to run the numbers for your situation and the particular loan and home.  A "point" is 1% of the loan amount.  It is also know as pre-paid interest.  So, if you're getting a $250,000 mortgage, a point would equal $2500.  You would give up $2500 at closing in order to get a lower mortgage interest rate and lower payments.

Your major consideration is how long you'll be in the home.  Let's say that you could pay 2 points on this loan and get a 4.75% interest rate instead of the no-point rate of 5.5%.  It's all math after this, as your savings can be calculated over time.  One other consideration could be taxes, as you can totally deduct the $5000 (2 points) in the year the home purchase loan is originated (different for refinancing). 

  • Loan without points payments would be 1419.47 on a 30 year mortgage.
  • Loan with $5000 in points paid up front would have payments of 1304.12/month.
  • Savings of $115.35/month.
  • If you only stay in the home 5 years:
    • Could have earned $8.75/month in 2.0% bank savings account on the $5000 if not paid.
    • Deduct that savings from the $115.35 to come to a net savings of $106.60/month
  • In this example, it would take 47 months to break even, so staying in the home 5 years would put you ahead.
  • However, if the interest rate drop was less than this example's .75%, you would probably not gain anything in this time period.

You can see that this decision is heavily influenced by how long you expect to stay in the home.  Work with your mortgage broker to see if paying points is the right thing for you.

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