When Should You Buy Points?

Common sense tells us that the lower the interest rate on a loan, the less money will be spent throughout the course of the loan repayment. In order to help borrowers secure the best interest rate possible, many lenders offer optional points that will lower the interest rate beyond the rate normally offered for an approved lender. Points vary in price and in the percentage decrease they buy. In some cases, they are an exceptionally good deal and should always be purchased. In others, they will only result in losing money.

The primary factor in deciding if you should purchase points on your mortgage is how long you plan to keep the property you’re purchasing. If the property in question is a primary residence for a well-established person with a stable career, or if it is a rental property intended for long-term investment, points are likely a good choice.

On the other hand, if you’re looking to keep a property for five years or less, are purchasing a “starter home”, or are not certain where your career may take you, you may want to pass on purchasing points. While points, if paid up-front, will lower the interest rate and therefore the monthly payment on a property, they need time to really be worthwhile.

Find out how much points will cost from your chosen lender. Next, determine the amount of the loan after all costs have been added in and the down payment has been subtracted from it. Calculate how much interest you will be paying every year on the property, using a good amortization table with your interest rate. This should be calculated for both the original rate and the rate with points.

After you have calculated the yearly interest charges with and without points, add up how many years you will have to keep the property for the points to pay for themselves. If you’re paying $3,000 for points that will make a $300 difference in your interest payments, it will take ten years to pay back the cost of the points. Are you planning on keeping the property at least that long? If the answer is a definite yes, then you may want to find out more about purchasing points. If the answer is no or you’re unsure, most likely you would be better off just paying the original interest rate.

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