The points trade­off


Should you pay points? What a ques­tion. Of course you don’t want to pay points. Most home­own­ers and buy­ers look for the best rate for their fi­nanc­ing with the low­est closing costs. At the time of pur­chase, cash can be dear so a new mort­gage with the low­est closing costs is very log­i­cal.

Could there be an ad­van­tage to pay­ing points? Is there a ben­e­fit to pay­ing higher closing costs? Should buy­ers ex­plore both sides of this costly is­sue be­fore mak­ing a de­ci­sion as to pay­ing cash at closing to buy down the in­ter­est rate or go­ing with the low­est closing costs? Yes to all ques­tions. Let’s ex­plore this mys­tery of points.

“Points” are sim­ply a per­cent­age of the loan amount. For a $500,000 loan, one point is 1 per­cent of the loan amount or, in this case, $5,000. Also called dis­count fees, orig­i­na­tion fees, dis­count points, or mort­gage fees, they are all phrased as a per­cent­age of the loan amount.

Con­sider a buyer want­ing a $500,000 loan. The cur­rent 30-year rate (with no points) is 4.25 per­cent and the rate is 4 per­cent with 1 point. Why should the buyer pay an ex­tra $5,000? The monthly pay­ment at 4 per­cent is $73 less then at 4.25 per­cent: $2,460 verses $2,387. And at the end of five years your bal­ance ow­ing on the mort­gage is $452,237 at 4 per­cent and $454,038 at 4 per­cent. At 10 years the monthly sav­ings be­come $8,760.

Only the home­owner can de­cide if the sav­ings from a lower rate is worth higher closing costs. Do not ac­cept the first quote with your bank or mort­gage com­pany. Ask for com­par­isons of costs at dif­fer­ent rates. Most lenders want to give you the stan­dard quote and move on. Force them to dig and be of ser­vice to you. Youwant the best in­ter­est rate for your sit­u­a­tion.

Make an ed­u­cated de­ci­sion. I did a loan re­cently for a buyer on a 5-year ARM. The rate, pay­ing 1 point, was 2.75 per­cent as com­pared to 3.125 per­cent with­out a point and the sav­ings even sur­prised me.

Cer­tainly it is true that pay­ing a higher in­ter­est rate will get you more of a tax de­duc­tion. But please don’t con­sider that false sav­ings. Also, it is im­per­a­tive to work with a loan of­fi­cer who is ca­pa­ble of do­ing th­ese cal­cu­la­tions and who will spend time with you to de­ter­mine your best op­tion. Ask for a com­par­i­son. Study the cal­cu­la­tion and get an­other quote from an­other mort­gage loan of­fi­cer if things don’t look right.

Jim Gay was a real-es­tate bro­ker for 20 years and has been a fi­nan­cial con­sul­tant to For­tune 500 com­pa­nies. He is cur­rently a bro­ker/owner ofThe Mort­gage Place (986-9080) and can be reached at jim@ jim­gay­home­m­o­rt­

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