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@ jimgayhomemortgage.com.