When it comes to comparing interest rates for a mortgage loan, home buyers often have the option of choosing a loan with a lower interest rate by paying points. Simply put, a point is equal to 1 percent of the loan amount. For example, with a $100,000 loan, one point equals $1,000. Points are usually paid out-of-pocket by the buyer at closing.

Paying points may seem attractive, because a lower interest rate means smaller monthly payments. But is paying points always a good idea? The answer generally depends on how long you plan to stay in the house. Let's look at an example:

Suppose you are shopping for loan rates on a $150,000 home. Their bank has offered them a 30 year loan at 4.5 percent with no points. This works out to a monthly payment of $760.

However, their bank has also offered them a loan at 4 percent if they agree to pay 2 points (or $3,000). At this lower rate, their monthly payment drops to $716, or a savings of $44 per month.

By dividing the amount they paid for the points ($3,000) by the monthly savings ($44), we see that they will have to own the house for 69 months (or just under 6 years) before they will start to see savings as a result of paying points. If you plan to stay in the house for many years, then paying points could make good sense. But if you see yourself moving to another house in the near future, you would be better off paying the higher interest and no points. 

However, one side benefit of paying points on a mortgage loan is that they are fully tax deductible for the same tax year as your closing. As to this example and all posts regarding tax situations, please check with your tax professional. 

Aloha and Mahalo,

Theresa Harden
Principal Broker e-PRO Realtor

Direct: (808) 223-0429
Office: (808) 234-5880
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Skype: theresa.harden
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Kaneohe, HI 96744

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This post has been included in Hawaii Real Estate News
Post is included in group: EXIT Relocation Network

1 Comments on Should You Buy Down Your Mortgage by Paying Points

MAR
17
2012
1,153,804 Points 86 Featured Posts Outside Blog Attended Rain Camp Called Shot Master

Theresa, people get so wrapped up in having a lower interest rate that they don't look at all the options. This is an easy formula to measuring the value of paying points
2:10pm • #1


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Theresa Harden PB SFR e-Pro Realtor

Kaneohe, HI

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EXIT Real Estate Associates

Address: 45-880 Kamehameha Hwy, Kaneohe, HI, 96744

Office Phone: (808) 234-5880

Cell Phone: (808) 223-0429

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