When you are getting ready to purchase a new home, one of the big decisions you can expect to be making is whether or not to pay “points” on your mortgage in order to save money on interest. There are several factors that will determine whether or not you should pay up front or keep the interest as it is. However, you should first understand how points work before you set about choosing any one option over another.
What are Points?
When you are taking a loan, one point is the equivalent of one percent of the total mortgage that can be paid at closing to reduce your interest rate. While sometimes people with very high credit scores (usually in the 650s, 700s, or 800+ range) are eligible for a low interest rate without being expected to pay, most of the time, points come standard with the average borrowing situation.
Can you Afford Them?
One of the factors in deciding whether or not you should pay is whether or not you can do it without stretching yourself too thin at closing. Unfortunately, that is the reasoning behind many of the decisions you will make about your mortgage. Not, “is it right for me?” but “can I afford it that way?” If you have been saving for a long time, accumulating a sizable down payment, preparing for your closing costs, and generally getting yourself into a very favorable financial situation, you may find that you are able to pay points at closing and get a great interest rate on your home loan as a result. However, if your financial situation is precarious, you should probably not attempt to make these payments.
How Long are you Staying?
Another key factor in deciding whether or not you should pay is the amount of time you plan to live on the property you are purchasing without selling it. If you are planning to stay for less than five years, it is highly unlikely that you will ever get back the money you paid up front in savings on your rate. Keep the money in the bank, pay the slightly higher payments, and know that you are making a smart decision in the long run.
If you are planning to stay for between five and seven years, it is time for a close evaluation. Speak with a mortgage professional or use an online calculator to determine whether or not you can save money. For as short a time frame as this, sometimes it works well and sometimes it does not. That largely depends on the amount you are borrowing and the rate you have without points compared to the rate you have with them.
Now, perhaps you are planning to stay in your new home for ten or fifteen years, or even the entire duration of your mortgage. If that is the case, then by all means, do what you can to get the money together up front and pay off those points at closing. You will save in the long run by paying a significantly lower rate, and that is something you simply won't regret!
