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Should I Pay Points?
Paying discount points will on average reduce your interest rate by 1/4 of a point for each discount point you pay. Discount points are an upfront payment of interest made to the lender/broker. Whether or not it is worth it for you to do this depends on your situation. For most people, we do not recommend it. On the surface it appears to be a good idea, and it can be, if you are going to own the property for a while and don't anticipate refinancing in the near future. Points are equal to 1% of the loan amount. So, on a $200,000 loan it would cost you $2,000 to reduce your rate by 1/4 point. On a $200,000 loan, with a 30 year term, this would reduce your mortgage payment buy about $35 per month. At a savings of $35 per month it would take you about 57 months to recover the $2,000. Each month after that you begin saving $35 per month. This could potentially mean a savings of $10,605 over the term of the loan. However, you need to take into account the time value of money. If you were to keep the $2,000 and invest it today, what would it be worth in 30 years? |
