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What are Points and When Should You Pay Them?

By
Mortgage and Lending

Points are up-front fees paid by the borrower to obtain a better interest rate on a loan. One point equals one percent of the loan amount. And while a lower interest rate may result in a lower monthly payment, it is important to consider how long you intend to be in the loan and to compare current interest rates to historical market trends. This will help you to determine whether paying points is a worthwhile investment.

Let's look at a sample scenario. If you take out a $300,000 mortgage and decide to pay one point in order to lower your interest rate, this would translate into an up-front cost of $3,000. To keep things simple, we'll assume that paying this one point will save you $50 a month. This means it will take you 60 months to recoup the cost of that point. If you decide to refinance or sell the home before the 60-month mark, your money is lost â€" not to mention the opportunity cost of not having this money invested elsewhere. In this scenario, you would only benefit financially from paying points if you were to remain in the home for no less than 60 months.

It's also important to remember that interest rates run in cycles. When rates are at historical lows, it makes more sense to pay points if you plan to live in the home for an extended period of time. If it's unlikely that rates will go down in the near future, then there will be no need to refinance.

When interest rates are high, however, there is a strong likelihood that they will come down again before too long. Therefore, this is not a good time to pay points. The chances of refinancing in the near future are extremely high, and you will likely not be in the loan long enough to recoup the up-front cost of the points.

Tax deductibility is another thing to consider when choosing whether or not to pay points. For new purchases, interest from both points paid and your mortgage are tax deductible up front. For refinances, however, points are not deductible up front. Instead the deductions are spread out over the term of the loan (unless the entire loan is paid off early), making points more costly in comparison.

Ultimately, there's a lot to consider when it comes to points and whether or not they are a worthwhile investment. An experienced mortgage professional will work with you to determine the best course of action based upon your specific situation. Request a comprehensive cost comparison to see whether paying points could be financially beneficial to you.

Comments (13)

Jeffrey DiMuria 321.223.6253 Waves Realty
Waves Realty - Melbourne, FL
Florida Space Coast Homes

Great point (no pun intended) and a good post. I wonder what % of buyers stay in the home five years???

Aug 07, 2008 11:16 AM
Karl Peidl
Moorestown, NJ
Accredited Loan Consultant

According to The Census Bureau, the average homeowner stays in their home for 14 years.  Of course, that doesn't mean they'll stay in their original mortgage that long. 

Aug 07, 2008 11:24 AM
Paul Silver
Tiverton, RI
Rhode Island full service real estate firm

hmmm... I thought points were ways for mortgage brokers to make their money in a different way than the yield spread... pay the broker now, or build it into the interest rate... is not that how it works?

Aug 07, 2008 11:24 AM
Nathan Diones
Regioncy Real Estate - Redlands, CA

Good points and great blog Karl! Thansk for sharing.

Aug 07, 2008 11:28 AM
Karl Peidl
Moorestown, NJ
Accredited Loan Consultant

"mortgage brokers" have all kinds of creative fees they charge to make money on a mortgage. Fortunately, I am a mortgage banker, not a broker.  There is a huge difference.  Maybe I'll make that my next blog topic...

To answer your question, sometimes what should be labelled as an origination fee is disclosed as a discount point because the lender is afraid to let the borrower know that banking is a for-profit business... as is real estate sales.  A bona fide discount point allows the to make an upfront investment which allows for a lower monthly and long term cost for the loan. 

Aug 07, 2008 11:33 AM
Tom Davis
Harrington ERA,DE Homes For Sale, $$ Save $$ Buy Today ! - Dover, DE
FREE Delaware Homes Search!, $$ Save $$ - Find Homes! Delaware Realtor

Good job...at first I thought you were talking about "Active Rain Points" when I first glanced at your blog title lol :)

Thanks,

Tom Davis

World Class DE Realtor

Aug 07, 2008 12:37 PM
Ron Martin
Keller Williams Realty - Spartanburg, SC
Ron Martin Team

Good Morning, welcome to the active Rain. With as many members we have you shouldn't have a hard time networking your business. I'm looking forward to blogging with everyone to enhance our business  and receive referrals from each other.  I've enjoyed this site because it offers tons of information that all of us can learn from and have fun at the same time. Good luck and have fun.

 

Aug 08, 2008 12:36 AM
Paul Howard
Paul Howard, Broker, Paul Howard Realty 856-488-8444 - Cherry Hill, NJ
Paul Howard Realty, 856-488-8444

Welcome to Active Rain.

Lots of info here and it looks like you have some to share.

Thank you and Good luck.

Aug 08, 2008 02:25 AM
Sasha Miletic - Windsor Real Estate
RE/MAX Preferred Realty Ltd. - Windsor, ON

Hi Karl, Welcome to AR, Be a Blogholic and start writing your own blog soon on AR. All the best for your RE business. This is the right place for customers, friends, realtionships etc.

Best - Sash 

PS: FREE blog traffic strategy video...Hope this will help you... click here

Aug 08, 2008 03:04 AM
P G
Charlottesville Solutions - Charlottesville, VA

I see that you are new to Active Rain and I just wanted to welcome you. I hope that you enjoy it as much as I do and that you find it a great resource.

Aug 09, 2008 11:26 AM
The Somers Team
The Somers Team at KW Philadelphia - Philadelphia, PA
Delivering Real Estate Happiness

Karl, That is a great post regarding points - simple and to the point.  A lot of people get confused about how they work and when they should be used - your post brings it to light !

Also, similar to what Peg said, we also welcome you to A/R !  It is a great universe of knowledge, energy and resources !

Will look foward to reading more of your blogs !

Philadelphia Real Estate

Aug 10, 2008 01:25 AM
Nancy Larson
I am a licensed referral agent in NJ - Hutchinson Island, FL

I would rather share my commission with a client than have them pay points, unless they were adament about buying down the rate.

Aug 10, 2008 02:26 AM
Karl Peidl
Moorestown, NJ
Accredited Loan Consultant

Thank you to all those that have welcomed me to AR.  Please let me know if there are any mortgage related questions you have that you would like to see as a blog topic.

Nancy - this blog was meant as an explanation as to what points are and how they work, not as an endorsement for everyone to pay points.  I always thought my responsibility to my customers was to present them with their options, explain that benefits and disadvantages of each, make a recommendation, and allow them to make an educated decision. 

Aug 10, 2008 03:49 AM