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To Pay or Not To Pay... That's the Point!!!

How do I know when I should pay them? Are they a good deal or not?

They are a great deal if the borrower stays in the loan long enough. And, do I have to say it? They are a bad deal if the borrower doesn't stay in the loan long enough.

Quite simply: Divide the cost of those points by the monthly reduction in mortgage payment and you will have a breakeven point represented in number of months. Stay longer than this number and your investment starts paying dividends. Stay in the loan less months than the breakeven number and you wasted your money.

So, this has been written about many times. What's the point? Well, the point is that 'Discount Points' are a FANTASTIC deal right now!!!** Why? Because the yield paid to lenders for each 'coupon rate' (your interest rate) is very similar for each rate. Your 'point' buys a lot more than it did just a month ago.

Not convinced? It's YOUR LOAN. Your loan officer should let you have your loan YOUR WAY. But take the time to learn and understand 'points' and what they can do for you!!

An example:

Amortizing a $200,000 over 30yr, a 5.25%*** interest rate = $1,104.41 monthly payment.
One discount point could get you down to 4.75% with a payment of $1,043.49 monthly payment.
Savings = $61 per month. That 1% discount point / 61 = 32.78 months. Stay in the loan for 33 months and you will have spent your money wisely...... as that $61 savings keeps coming EVERY month. But, with that said, if you sell or refinance before you reach month 33 then you wasted your money on the discount point.

1% discount point doesn't always buy a .5% reduction in rate. It does now!! Have your lender calculate a couple of options for you!! And remember, discount points can be paid in smaller increments. .5% discount would get you .25% reduction in rate.
A month ago, you couldn't buy as much discount for the same money.

** Rates and points benefits fluctuate daily.

*** Rates for illustration purposes only and not an offer to lend. APR varies.

Tom Burris
DallasLoanGuy.com
Dallas, TX

"Your Dallas Mortgage Consultant"

http://www.dallasloanguy.com/

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I write about Texas Home Loans , live in the Dallas, TX area and lend across the entire Great State of Texas!! Subscribe to My Blog and stay informed about current lending changes!!

While I personally focus on Texas Home Loans and First Time Home Buyers.... I do lend in other areas.

Posted by Tom Burris | Texas Mortgage Dallas Mortgage FHA on 01/26/2009 12:59 PM

Comments (10)

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10 Comments on To Pay or Not To Pay... That's the Point!!!

JAN

Well put Tom. Little Burger King reference there, 'have it your way'.....It's never about the rate, it's about the payment and the principle reduction. Very seldom do I hear groups of people bragging about the low interest rate on their mortgage. How the terms of the loan match your financial objective is most important. Again, well said!

This is not my field but I am always wanting to learn new stuff. However, when I hear you all talking about discount points or yield spread, I get lost. Huh?

Well, Angelia, you should sit down with a loan officer and get an education.

It is easy when you see it....

Tom.. I love it when people go, I want zero points.. it's cheaper. Well, depending on how you look at it, you need to know more. Not sure what Robert was talking about, unless you added the examples. But you make some good points. I write about this once a year. I am do for another one... and you are right, just in the last 4 days, could you pay 1 pt and basically lower your rate by a 1/2 percent. It ususally is 3/8 of a point per 1/8 of a percent. which meant that you could spend a point and reduce your rate by 3/8%... so this is a good deal. But only a tru expert or mortgage professional looks for this, hence giving better value to the borrower.

jeff belonger

JAN

Tom--This makes a lot of sense...pays to ask questions and read blogs. People forget that paying a point upfront can make the payment easier in the long run. Good information.

Jeff: They want zero points because they trust some uneducated person. Realtor, parent, ect.

Teri: It pays to keep an open mind. Points aren't evil. They are a tool. Not for everyone... but certainly for a lot of folks.

Tom,

You make a good point about points. It seems very unique to each home buyers situation.

Tom,

Well sir...I got your point! I guess there is a very good reason for that. Very good simple and concise explanation. Congratualations for being recognized in this weeks edition of MWIR.

JAN

Tom,

I make the same arugment, I have been for nearly 40 years, but I start one step earlier?

Before you consider should you pay points , y

ou need to ask "Can I afford to pay points?"

So many home buyers just can't afford to buy the loan down, to them buying up is often a good idea. Many others have the option, but would be better off conserving their cash.

The best advice talk frankly with your mortgage professional and if in unsure conserve your cash! If you must spend your money consider additional equity, equity is recoverable points are gone when the loan closes.

Bill

JAN

Great 'point' Bill.

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