Mortgage Points - To pay or not to pay, that is the question! Schaumburg Homes - Lyn Sims (847)230-7324 RE/MAX Suburban

To pay or not to pay …. That is the question! 

William Shakespeare could have done a whole play on how to get a mortgage if they had that sort of thing in his day.  So welcome to my posts named ‘Real Estate 101’ where I will try and demystify some of the real estate buzz words!

So let’s begin talking about Mortgage Points! 

Pay vs. Add to Principle?

What should my strategy be?

What value will I receive over time if I do pay points?        Don’t pay points?

Will they shackle me to a chair and make me pay points at the closing?

When you pay "points," you pay interest in a lump sum upfront to get a lower rate on your fixed rate mortgage. Each point costs 1% of the mortgage amount ($200,000 mortgage 1%=$2000). The more points you pay, the lower your mortgage rate. As a general rule, you can expect to reduce your interest rates by 1/4 to 1/8 of a percent for each point you pay up front. Additionally, because points are considered to be interest payments, they are usually tax-deductible.

So, which is the best for you?

    More points and a lower rate?    

          Or fewer points and higher rate?

To decide, you need to consider: (1) Whether you can afford to make the upfront payment now for points. (2) The length of time you expect to have the mortgage. The longer you plan to have your mortgage, the more it makes sense to pay for points now because you'll have a long time to benefit from the lower rate.

So let’s answer a couple of questions below and we'll throw out a few scenarios.  See what's best for you!

I have 15 to 18% down.          Recommendation:  You should NOT pay any points with your mortgage.

Here's why:  Because your down payment is less than 20% of the purchase price, your lender will likely require you to purchase mortgage insurance (PMI) which would be an additional upfront cost for you. Rather than pay this additional cost, it would probably be better for you to not pay for points and instead use that money to increase your down payment. By increasing your down payment to the 20% level you can avoid the cost of PMI.  Big savings!

I have 30% down so I won’t have to worry about PMI.              Recommendation:   You should pay points with your mortgage.

Here’s why:  You plan on staying in this home for the next 10+ years until your children are thru high school and possibly college.  You hate to move and this house seems like a good long term fit.   You win with a lower payment over the next 10+ years with paying those points.

I have only 5% down.               Recommendation:  You should NOT pay any points for your mortgage.

Here’s why:  You’ve scraped and saved every last dime since your 10^th birthday and now your savings account is cleaned out!   You will not have any furniture to sit on or any dishes to eat off of.  It just doesn’t make sense to go into your new home without any type of cushion in your bank account and eat macaroni and cheese for the next year.  Take the prevailing rate and begin in your new home.

Can I ask the seller to help me pay points?               Recommendation:  Yes you can. 

Here’s why:  In today’s market most sellers are happy to help someone out with their mortgage.  But, just remember that the ‘favor’ might come with a price.  The price might be paying a higher dollar amount for the home!   The seller might just take a lower price NOT to help you with those points! 

 Lyn Sims (847)230-7324 RE/MAX Suburban

Listing and Foreclosure Search at:  www.LynSims.net

 
Origination Points vs. Discount Points – Don’t get them confused.  This post is about Discount Points but here’s a brief explanation :  Origination points are used to pay for the costs of obtaining the loan in the first place. They are much less popular than discount points, as they do not provide borrowers with any valuable benefits and are not tax deductible. Borrowers are therefore better off trying to get a loan that does not require them to acquire these kinds of points.

I proudly serve and sell real estate in the Northwest Suburbs of Chicago.  If you are thinking about purchasing or selling your home in the communities of Schaumburg, Hoffman Estates, Elk Grove Village, Roselle, Palatine, Medinah, Itasca, Bloomingdale, Carol Stream, Bartlett, Hanover Park, Streamwood, Elgin, South Elgin, St. Charles and more importantly, want to work with a local area expert, contact me immediately.

To Pay or not to Pay©2009 Lyn Sims - RealEstateConsumerInfo.com  All data and information provided on this blog is for informational purposes only.  Lyn Sims makes no representations as to accuracy, completeness, correctness, suitability or validity of any information on this site and will not be liable for any errors, omissions, or delays in information or any losses, injuries, or damages arising from it’s display or use.