IS IT WORTH IT TO PAY POINTS ON A MORTGAGE LOAN?
WHAT ARE POINTS?
Points can be classified as an origination fee or discount points. Depending upon how good the mortgage loan originator is in explaining the costs and fees, it can be unclear as to what a borrower is being charged points for.
Points are money - whether you pay in cash or finance them.
WHY ARE POINTS CHARGED?
Points can be charged to improve an interest rate (buydown) or to cover other costs associated with the loan program.
THE FIRST STEP IS TO DETERMINE WHAT THE POINTS ARE FOR.
When quoted a loan origination fee, ask the mortgage loan originator if the loan is available with zero origination fee and at what rate. The same goes for discount points; is the loan available with no discount points at a higher rate.
There are some loan programs such as VA and FHA that have up front mortgage insurance or funding fees. These fees are not negotiable as to the amount. They can be paid out of pocket, financed or by a third party.
So, what are the points quoted for? - Program fees or rate improvement.
MY APPROACH TO POINTS IS TO SHOW THE BORROWER OPTIONS.
When quoting interest rates I almost always give the borrower the interest rate as close to a zero origination fee as possible. Then it is easier to build on that by discussing alternatives. Compare the principal and interest of the zero origination loan with one where 1% origination is charged. Divide the origination charge by the monthly savings to determine the break even point.
WHAT BREAK EVEN POINT MAKES SENSE?
This is a very personal question. If a break even period is five years, but the owner may sell before then, the extra point(s) would not make sense. One would not recoup the money. If, however, the owner will live in the home for the foreseeable future, even a longer break even period may be worthwhile.
When you pay points on a mortgage loan and your break even point finds you still in the home after that you will begin seeing the savings. Ideally you will be in the home for some years past the break even point. All too often borrowers get swept up with the idea of an awesome interest rate. When it comes at a cost of origination fees or discount points, it is not always the right way to go.
Best advice is to work with a trusted source of financing, ask questions and be sure you get clear concise answers. Don't be afraid to ask and be sure you understand the options.
