With interest rates at the lowest they’ve been in most of our adult lives it’s a pretty tempting time to buy or refinance your mortgage. One option you often have when negotiating a home loan is whether or not to buy points.
What are points?
Points are basically pre-paid interest. You will pay 1% of the loan amount to bring down the rate by .125%. So if you are financing $150,000 you will pay $1,500 for one point. The lower your interest rate the lower your payment will be and you will pay the less interest over the course of the loan. All good things right? But is it too good to be true?
Should you buy points? Let’s run some numbers and find out.
Let’s say you are going to take out that $150,000 mortgage and your lender gives you the option to buy points. One point will cost you $1,500 and will bring your interest rate from 4.5% to 4.375%. Is this a good deal? Keep in mind that the lower interest rate will also lower your payment by a little bit, you could take the monthly savings and apply that to your monthly mortgage payment. Instead of buying a point with your $1,500 you could apply that to your down payment, and therefore borrow less. That would also decrease your monthly payment a bit and you would have the option to take those monthly savings and apply it to your payment.
So, considering all that, you have 5 options here when making this decision so let’s look at them all.
- Option 1: Don’t buy points and take your mortgage as is.
- Option 2: Buy points and pay nothing extra per month
- Option 3: Buy points and take the savings from the lower payment and apply that to your monthly mortgage payment.
- Option 4: Don’t buy points but instead increase your down payment by $1,500, pay nothing extra per month.
- Option 5: Don’t buy points but increase your down payment and then take the savings from the lower payment and apply that to your mortgage payment.
I ran the numbers and here are the savings I came up with
- Option 1: Do nothing = $0 savings
- Option 2: Buy points, pay nothing extra: $2496.03 in savings
- Option 3: Buy points, pay extra: $6,596.16 in savings
- Option 4: Increase down, pay nothing extra: $1,236.10 in savings
- Option 5: Increase down, pay extra: $4,201.10 in savings
Clearly, option 3 is the winner. If given the option (in this scenario at least) you should buy a point and use the savings from the lower payment to increase your monthly mortgage payment. In this scenario your new monthly payment would be $748.93 and you would be paying $11.10 extra per month; for a total payment of $760.03. Your total interest paid would be $115,513.91, which is a savings of $8,096.16 over doing nothing. But don’t forget you paid $1,500 for the point, so that takes your total savings down to $6,596.16.
So is buying a point always the clear cut winner? Not necessarily. You should always run your own numbers to make sure it’s right for you. Keep in mind the numbers I used assume you will keep the mortgage for the full 30 years. If you plan on moving, refinancing, or paying off the mortgage early then your potential savings from this scheme will be reduced. If you are currently wondering if buying points is right for your situation and want some help making this decision you can contact me at ashley@moneytalkscoaching.com and I’d be happy to help you.
Have you dealt with this issue in your own life? What did you choose? How did you make your decision?
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