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."
Comments
You forgot to factor in the tax savings on the point you paid. The payoff would not take as long after that.
Posted by: applezz | December 17, 2007 10:00 AM
This article fails to consider the time value of money. Vail could have taken that money and invested it. If she had earned 8% return per year, she'd now have nearly $3,000. She needs to stay in the house long enough to get that money back, too.
Posted by: Joe | December 17, 2007 10:38 AM
Good point, Joe. A lot of calculations fail to take "opportunity cost" into account.
Of course, opportunity-cost calculations fail to take into account the tendency of Americans to spend rather than save or invest, but that's another story altogether.
Posted by: Jamie Smith Hopkins | December 17, 2007 10:53 AM
Pay as little as you can to get into your home. With low interest rates, the still available 100% financing (for those with half-way decent credit), and significant price drops, it is silly to pay more in rent than to buy. Afterall, we are at the bottom of the market or somewhere around it. Remember every dollar you pay in interest is tax deductable. If interest rates weren't so low and home prices ... it might make sense. But paying points right now is silly.
Where I live and sell homes in the city, some prices have fallen back to '03, and the interest rates are down, while the amenties and community are way up!!! Meaning, you can buy low and sell higher, and still pay less than rent in most cases. WTF!
Sure you can rent a nice place for $1700, but why not buy at $1500 and get the wright off for $3k per year, knowing you are near or at the bottom of the market, with profit to be made as long as you don't make your house a piggy bank?
Right now you would only buy a point, if you could barely afford a house, in that case don't buy it! Negotiate better or look for another. Does anyone else have an opinion? I don't even see points being worth the time of day.
The only senerio that I can think of is buying a point for investment.
BTW: Lending Tree is not a very good deal. You could end up with a west coast lender (never available when you need them) and HUGE closing cost fees WAY beyond the norm. Lending Tree is a broker, not a lender. The only Lending Tree transaction I did was for a young couple who paid $3k more in closing costs than they would have with a true lender, now they are selling two years later as most City folk do and are screwed. Go to a true lender unless you need a specialty product. They are easier to deal with too, especially if they are local.
Posted by: Christian Dunn | December 17, 2007 3:09 PM