Paying Points To Lower Your Interest Rate
Believe it or not, sometimes paying points to lower your interest rate can be
a good thing.
We've been conditioned to believe that paying points to lower an interest rate is
a scam, a way for sly mortgage brokers to take advantage of uninformed borrowers.
Not so all the time. Paying a few points can save you money on your mortgage if you plan
on living in the home long enough to re-coup the expense (cost) of the up-front points.
Say, you need to borrow $280,000 because you and your spouse gotta have this house, no doubt about it.
You also need the interest rate to be at 5.25% to fit your monthly budget. After the lengthy application /qualification process
with your bank they decide despite your disappointment, to approve your loan at a higher 6% for a 30 year fixed rate.
So, your total monthly payment will be $1,678.00 for 30 years with the 6% loan.
That's stretching your budget, you may not be able to afford that monthly note
Instead of making your
wife or husband get an extra job dressing up like a taco or delivering papers before the rooster crows, you may opt for the lesser humiliating option of
purchasing points from your broker thus lowering your interest rate/monthly payment.
Paying for 3 points will lower your interest rate to 5.25% and brings the monthly payment down to $1546.00. That's because each point purchased lowers your interest rate by .25%. Also each point will cost 1% of the amount borrowed. That would be $8,400 in this case, which is paid upfront or rolled into the cost of the funds borrowed.
"That seems like a lot of money" your probably saying.
It's all relative, here's the facts...
If you pay NO points the total cost of the interest paid on this loan will be $324,080.
If you pay 3 points the total cost of the interest paid on this loan will be 276,560.00
So, as you can see, you spend $8400 upfront to save $47,520, if you choose to pay points.
However, no savings will take place unless you live in the home long enough to realize the savings! You will
be saving $132.00 per month so
it will take about 5 years or 63.6 months (63.6*$132=$8395 ) to recoup the cost of the points paid upfront.
So, paying points to lower your interest rate can actually save you money in the long run. However the decision to
purchase points to lower your interest rate should be strictly based on how long you plan
on staying in the home and how much cash you have at closing.
