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2020-01-24 08:38:43
Are mortgage points worth it?

So you're buying a new home and you've been working with your mortgage loan officer on getting your loan all taken care of, and at some point during the process, he says to you, 'Hey, here's your interest rate. We can lock you in at, I don't know, 4% or whatever, but if you pay a point or a point and a half or whatever it may be, we can get you down to 3.75%.'

You're left thinking, I've heard of points before, but I'm just really not sure what that means. So what does it mean to pay points or to buy down your interest rate?

Essentially what it means is your loan officer's giving you the opportunity to spend a little bit more in your closing costs upfront to buy down your interest rate over the long term. Sounds like a great idea, right?

Well, maybe it is, but then again, maybe not. So I'm going through this exact scenario right now in my own personal life as we're building a new home. I've been quoted an interest rate of 4% with no points, but if I pay one point then my interest rate can to 3.8%.

Okay, great. What's a point? Well, one point is 1% of the value of your loan. For example, on a $250,000 loan, a point is $2,500.  So essentially what I'm being told is for an additional $2,500 out of my pocket up front, I can get my interest rate from 4% to 3.8%. So is that a good deal? I don't know. Let's take a look.

 I found this great calculator online at nerdwallet.com and I'm going to show you how this works. Go to nerdwallet.com and then yourself over to the mortgage point calculator. It's really straightforward and pretty simple.

For example, lets assume  a $250,000 loan for 30 years at 4.0% and no points right now. The monthly payment is going to be $1,194 a month, principle and interest only.

Now let's assume that your loan officer is offering you one point. So in this case, one point is $2,500 because my loan amount is $250,000. With that one point it s us to 3.75%, so how does that compare?

Well, with no points, we were at $1,194. Now with the one point we're at $1,158 a month, but it cost us $2,500 to get there. And the calculator tells us that it is going to take us 69 months, or 5.8 years.
 to break even.

So you can see if you're going to be in your home for 10, 15, 30 years, then perhaps buying down your mortgage rate is a good thing. If you're like me and you like to move every five to seven years, then that's probably not in your best interest.

One other thing to consider is if you're going to be in your home for years to come, mortgage rates fluctuate. So you could pay down your interest rate now and it would take you seven, eight years, whatever that is, to break even and then beyond that, everything is icing on the cake.

But what if rates to the point that they're even better than what you paid it down to and now you're refinancing,  and you've already spent the $2,500 a couple of years ago to get to where you are now. But then again, who, knows what's going to happen with rates?

They go up, they go down, but that's just something else to keep in mind as well.

So there we have kind of a short Reader's Digest version of points and what they are and how they work.

Now in my personal example it's probably not in my best interest to pay down my points because I'm probably not going to be in my home long enough to break even. If you plan on staying in your home for an extended period of time, like my parents did, 50 years in the same home, then buying down your loan and paying points is probably a really good idea, but only you can make that decision for yourself.

But it's important that you understand what your loan officer means when he talks about using points to pay down your loan.

You can go to https://www.nerdwallet.com/blog/mortgages/should-i-buy-points-mortgage-calculator/ and you can input your own numbers and figure out what's best for you.

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