Paying “Points” is not always a Bad Thing

If the money is available, paying points is a great investment if you plan to own your home for 3-4 years or longer. Points are fees the borrower pays the lender at the time the loan is closed, expressed as a percent of the loan. (On a $100,000 loan, 1 point means a cash payment of $1,000). The more points you pay, the lower the interest rate. Paying points can be viewed as an investment that yields a return that rises the longer you stay in your house. The return consists of the savings in monthly payment from the lower interest rate, plus the ability to lower the loan balance monthly because of the amortization schedule benefit. For example given a generic scenario, a borrower could buy down the rate from 6.25% to 5.5% by paying 2 points. On a $100,000 loan. The investment in points is $2,000, monthly payment would drop by $47.93. The reduction in the payment plus the faster reduction in the loan balance, yield a return on investment of 6.4% over 3 years, 17.4%, over 4 years, and 28-29% over 8 years or longer. Now this example is true regardless of your original loan amount. So does paying 2% at the beginning look like a good investment if your plan is to live in the property for a significant amount of time? Make sure to weigh all your options when looking for a mortgage and don’t treat points like a bad thing. Paying no points may be even worse. Sometimes you do get what you pay for.