Is it best to pay points up front to reduce the interest rate?
When points are paid on a mortgage, the result is to buy down the interest rate, typically 1 point (or 1%) will buy the rate down .25%. The key to analyzing whether paying points makes financial sense is to determine: 1) How long do you anticipate remaining in the property? 2) When would the breakeven point occur? For example if you pay two points to buy your rate down from 8.00% to 7.50% on a $300,000 mortgage, the payment at 8.00% would be $2,201 and at 7.50%, the payment would be $2,098, with the difference in payment amounting to $103/month. With two points costing $6000, divided by the savings of $103/month equaling 58.25 months or 4.85 years to break even. You would want to hold the mortgage and remain in the property approximately 5 years for this to make sense. Other factors to consider are the tax implications of paying points (see our link to the IRS website) as well as the time value of money (could you put these funds to better use).
You may want to consider getting a zero points and zero closing costs loan as well. In order to do this you will need to accept a slightly higher rate than a No Points mortgage. Usually about .250% to .500% higher.
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Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
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