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Making
The Decision to Pay Discount Points
Discount Points are
paid up front to obtain a lower interest rate on your
mortgage. The more points you pay the lower the
rate. Usually, one point equals one percent of
the loan amount and will lower the interest rate by
.25 percent, so a loan amount of $150,000 at 1 point
would cost $1,500. The reason you may want to
pay points is determined by the amount of time you
think you'll be in the home. If you think
you'll be a long-term owner, it makes sense to pay
points to buy-down the rate. This will cost you
a little more upfront but the long-term benefits will
take effect down the road because of the lower
interest rate. This however, usually can take 5
years just to reach the break even point before you
realize any monthly savings.
Each borrower should be given the option to reduce the
interest rate, by paying discount points; it should
not be mandatory. At 1st Residential Funding we
do what is in our borrowers best interest. We
usually recommend that discount points are not paid
unless a 3rd party is paying them on the borrowers
behalf. An example of this would be if the
borrowers employer is paying closing costs as a part
of relocation expenses. Otherwise, it
usually does not pay to "buy down" the rate
with points!
The average home owner is in the same house for only
5-7 years, before moving on.
To get an idea of whether or not it is
worth it to pay points do the following:
Divide the amount paid in points by the amount saved
by the lower monthly payment. For example, if
you are borrowing $150,000 you can pay no points at 6%
interest for 30 years, which is roughly $899.00 per
month.
Or you can pay 2 points for 5.5% rate, which is
roughly $852.00 per month.
Your savings per month is $47.00 ($899.00 - $852.00)
Most people don't realize
it took over 5
years just to recover the cost of paying for that
discount point, it may take 5 more years to
save that same amount of money and in 10 years
you would have saved only what you spent when you paid
for the discount point. |
