Refinance > Frequently Asked Questions>Points or Zero Points
REFINANCE
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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