When Is It a Good Idea to Leverage Discount Points?
Considering if buying points is a good idea is more straightforward if you understand these key questions to ask yourself.
What Are Discount Points?
First, we want to understand discount points: a “discount” point is simply the cost to buy a rate. One “point” = 1% of the loan amount. Example: without paying anything extra (i.e., “zero points”), your rate = 7.5%. But, if you pay one point (or 1% of the loan amount), you get 7.25%. So, you just bought the rate lower, and thus, your payment will be lower. Please check out my handy discount point calculator to see how this works for you.
Questions to Ask When Considering Paying Points
How long will you be staying in your home?
First-time homeowners stay home for about four to five years. The median for most homeowners living in their home is about 13.5 years. Depending on how much you pay the discount points, you may not break even on the monthly savings you get from the interest rate purchased with your discount point investment.
What kind of payments do you plan to make on your mortgage?
Are you self-disciplined with an eye on doubling down and paying extra to repay your mortgage as quickly as possible? Again, same as the above scenario, you will want to consider your break-even analysis to determine if the extra points are worth it.
Will you use the loan to cover the points because you don’t have the cash to buy points?
In this situation, a homebuyer needs to consider that the money saved on the monthly payments might not outweigh the extra amount borrowed and the interest paid. Applying extra cash toward your principal payments is a better strategy in the long run.
Would you refinance or sell shortly?
It may not make sense to buy points. The reason is that when a borrower refinances, they will have to pay the origination points and fees again for the refinanced loan. Depending on when that refinance occurs, the borrower may not recoup the return of the original points paid.
For many borrowers, points are tax deductible. Check with your tax professional or www.irs.gov for any tax-related questions.
So, as you can see, it is wise to pay points to lower your rate depending on each borrower’s circumstances. What questions do you have? Connect with us to help you today.