Question by Claudio F: Does it make sense to buy mortgage points by refinancing?
I know that points reduce the interest rate and they can be deducted during the life of the mortgage, but does it really make sense financially to buy mortgage points or do they cost more than the benefit they offer?
Best answer:
Answer by Skywalking
I dont see why paying 1 point to lower the interest rate 1/8% makes sense. People say its worth it when you stay long enough to meet the break even point; where the amount of interest saved equals the amount in points you spent. Sure its logical to spend as many points as you can if you plan to stay there for a long time. But, there’s a reason why you shouldn’t pay any points at all; inflation. With a fixed mortgage rate, you will be paying less and less interest each month. And since your payment stays the same, inflation will actually take more of the value of your payments away. So essentially as the interest due is lowering, the value of the interest is also decreasing. Now, if you pay 2 points upfront, you will be foregoing a lot of its present value. Due to inflation that 2 points will be worth less in the future. The money you have in hand today is worth a lot more than it will be in any future period. That’s why banks offer you that option, cause they could have more valuable money to invest with. You would make more money if you let it sit in your savings account. It only somewhat makes sense if you stay the life of the loan.
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Only if you are staying in the home for the long haul. If you think you might sell or have to move within the next 3-6 year, then it’s not worth it to pay the points to reduce the interest rate.
USBank has a pretty good website for their mortgages. It gives you the rate, and how much per $ 1,000 financed you will pay. You can figure how much you will pay if you finance (for example) $ 200,000 at 6% with no points or 5.5% with paying 2 points. You can do the math, and figure out how long you’d have to stay in the house before that 1/2% reduction would make up for the extra money you’re paying to reduce it.
go to http://www.usbank.com
Click on “mortgage programs” and then click on “view rates”.
Right now a 30 year fixed with no points and no origination fee is 6.375%, which will cost you $ 6.24 per $ 1,000 financed. A 30 year fixed with a .875% points (discounts) and 1% origination fee is 5.875%, and will cost you $ 5.92 per $ 1,000 financed. This works out to be a difference of 32 cents. If you financed $ 200,000, that’s a savings of $ 64 per month and $ 768 per year.
However the second loan with the discounts and origination fees will cost you $ 3750 when you close, in addition to closing costs.
If you divide the up front cost of $ 3750 by the $ 768 annual savings, you will have to stay in the house 4.88 years before you break even, and your lower interest rate starts to pay for itself.
Again, if this is your home for the long haul, then definitely consider paying extra for the lower rate. But if you think you’ll be selling to upgrade, downsize or due to a job transfer in the next few years, it makes more sense to go with the higher interest rate and no fees.
no! I am a mortgage banker, have been a broker and also worked in wholesale. conventional, FHA, VA etc. rates are good enough now 30 year fixed you should be able to get if you float for 1-2 weeks around 5.5 par allow them to make a fee, but not gouge you! everyone has a financial change or a life altering event every 1.7- 2.1 years (2 decade average)(depending on your region) and you probably will not be in the loan long enough to over come the cost associated. do your homework, be smart and deal with the right person, firm or bank.