Should you pay points to your lender when buying or refinancing your home?
As written by Robert Aldana for the Press Banner
First of all, let’s discuss what a point is. A point is “pre-paid interest” you pay your lender that buys down your interest rate on your mortgage. Each point is 1% of the loan amount so if you are obtaining a $500,000 mortgage, one point would equal $5,000. That is why many times you see interest rates in the paper or advertisements that all look similar, but once in a while you will see one lender with an extremely low interest rate until you read the fine print that shows that you have to pay one or more points to get that rate.
At the same time, if you are short on cash, having a slightly higher interest rate would give you a rebate or allow the lender to pay some of your closing costs. So when you think you are getting the lender to pay for your closing costs and fees, YOU are the one who is really paying because you are paying a higher interest rate so that your lender can give you a rebate.
The thing is, most lenders get their money from the same place and most lenders are pretty competitive. When comparing rates, ALWAYS remember to also compare points, as well as comparing loan programs.
So should you pay points? That depends on how long you plan on being in that home. For example:
A $500,000 mortgage at 4%, fixed and fully amortized (pays itself off at the end of the term) for 30 years would give you a mortgage payment excluding taxes and insurance of $2,387 per month. If you were to pay a point to buy down that rate to say, 3.75%, your monthly payment would now be $2,316 per month. That is a savings of $71 per month. If it cost you $5,000 to save $71 per month, it would take you just over 70 months to recoup that $5,000, which is just under 6 years. So if you plan on staying in that home fore 5 years or less, it may not make sense to pay points.
The above is just an example. Different lenders have slightly different rates and point structures and you should have this discussion with your lender. In addition, in most cases the interest that you pay on your owner-occupied home can be tax deductible so if you are paying more interest, you would have a higher deduction. However, you still have to make that payment and if it costs you $100 to save $25, you are still paying more just for that interest deduction.
Bottom line, do the math, the numbers never lie.
As always, Happy Selling and Happy Buying!
REALTOR® since 1986
BRE # 00921165
Keller Williams Realty
831-252-3959 Direct Line
Robert Aldana is a 30+ year licensed real estate veteran with Keller Williams Realty, and also a long-term resident and homeowner here in town. He is the founder of MyScottsValley.com and the popular local news and events page at Facebook.com/MyScottsValley.
Robert was also a nationally syndicated real estate journalist and was a highly sought after interviewee on the topic of real estate by local, national and even international media, in addition to appearing on HGTV and local NBC’s “Best of the Bay”.
Robert was recently awarded the Santa Cruz Sentinel Readers Choice Award as the Best REALTOR® in Scotts Valley for 2016. Click here to read more.