What if I Pay Points Up Front
Is it best to pay points up front to reduce the interest rate?
When points are paid on a mortgage (to the lender
or bank), 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).
