How-to Monday: Points
If you're talking mortgages and not pencils, it's an upfront fee to get a lower interest rate. The more discount points you pay for, the lower the rate -- but don't assume it's always worth it.
Allison Vail with LendingTree, the online company that connects borrowers with lenders, says you need to figure out if time is on your side.
She notes that paying for one discount point typically means coughing up money equal to one percent of the amount you're borrowing in return for a quarter percentage point off the rate.
Here's the example she offered:
Say you're borrowing $100,000. (Yes, yes, I know most homes around here are a lot more expensive -- stay with me here.) If you get a 30-year fixed-rate mortgage with a 7 percent interest rate, you're paying $665 a month in principal and interest.
If you buy two points, your interest rate drops to 6.5 percent. That means payments of $632 a month.
A $33 savings every month: Better than nothing, right? Right -- as long as you're planning on staying for at least five years. Otherwise, you won't break even on the $2,000 upfront cost of the points. (It's actually five years and a few weeks -- 2,000 divided by 33 equals 60.6 months -- but you get the idea.)
"So if you plan on being there for a long time, that's great, because you're going to have an interest rate savings over the life of the loan," Vail said. "But if you plan on leaving, discount points may not be a good option. ... A little bit of looking into the crystal ball, I guess."
It worked out for Vail, who's had her loan for about five years and is now in the black on the two points she bought.
"Don't be scared to ask your loan officer to figure out your break-even point," she said. "Have them lay it all out so you can see the scale."