In the loan process many times when we talk to new clients they really don’t understand what points are and why it matters to understand if paying points make sense. A simple way to think about points is they are an upfront investment to get a lower interest rate that will pay out over time. The longer you keep the mortgage the higher the return on your investment paying points.
For example, on a $200,000-dollar mortgage. If you pay 2 points that will cost you $4000 at closing. You pay that $4000 up front to save money on your monthly payment. Let’s say a rate with no points is 5% for 30 years. On a $200,000-dollar mortgage that would make your principal and interest payment $1,073.64. If you pay the 2 points to buy down the interest rate the rate would be for example 4.5% for 30 years. Your payment would be $1,013.37 a month. You would save $59.97 per month in this example. The key is to make sure the plan is for you to stay in the house and the mortgage long enough to recoup your investment and realize some gains. In this case a simple way to figure out the approx. time you need to stay in the house and mortgage is take $4000 divide $59.97 this equals 66 months. You need to be in the mortgage 5.5 years before you start realizing the benefit of paying the points upfront for the lower rate. If you will be in the mortgage over that time then paying points up front makes sense. If you planned to stay in the loan over the full 30 years you can see the investment is well worth it. On the flip side if you stay in the loan for 2 years and move or refinance then you just lost a significant investment and taking a higher rate makes more sense.