Before you make such a choice, you have to understand exactly what points represent. Points are fees paid to the lender at the closing of the home loan. Each point=1% of the mortgage. If your mortgage is for $100,000, one point would cost you $1,000.
The idea behind points is to lower the overall interest rate on the home loan. Points, tough, are used in different ways by different lenders, so that one point at one bank may reduce your loan by 3/8%, whereas at a different lender it may be worth ?%.
The main criteria for whether or not you should pay points is how long you think you will have the mortgage, since paying the upfront cost, and moving out 2 months later makes no sense. Borrowing to pay points makes little sense, since the idea is to save interest, not pay it. If this is a starter home, and you are hoping to move up to a larger home in a few years when you start a family, paying points is probably not a great idea, and here is why.
Points need to be viewed as an investment in the mortgage. It may sound like a good idea to decrease your mortgage interest from 6% to 5%, but if you will only benefit for a year or so, the investment may not be worth while. You are paying a part of your interest in advance, effectively.
There are many calculators on the internet that will help you calculate how much you can save in monthly hhome loan payments by paying upfront points, based on the length of the loan or you can take the easy way out and call a mortgage professional to do it for you.
The $100,000 loan we are discussing would require $1,500 in points to reduce the rate to 5%. It is necessary to find the breakeven point on how sensible this $1,500 investment will be. The monthly payment for a 15 year 5.5% loan is 599.55 a month. A $100,000 6%, thirty year mortgage will cost $567.79 per month.
This is a clear savings of $31.76 per month, but don?t forget you had to pay $1,500 to get this savings. Simply divide $1,500 by $31.76 and you will see that it will take 47.23 months for the payment to be fully amortized. If you don?t plan on staying in your home for this length of time, you will not have any advantage from paying points.
After that point, however, the initial investment of $1,500 is covered, and you will now save a net of $31.76 each month. If you, unlike most homeowners today, stay in your home for the full thirty years, you would have saved $31.76 over those years, which is a total savings of $9,933.58.
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