Is it worth paying Mortgage Points?
published on 03/05/2014
A typical question asked when financing your home, be it a purchase or refinance, is, “would you like to pay points?” Many borrowers are often misinformed or confused about mortgage points. I can help.
Sometimes the word “points” gets thrown around loosely and people refer to the loan origination fee and points, also called discount points, as one in the same.
The loan origination fee is a payment for services, charged directly by the bank or lender, for handling the processing of your loan. This is typically a fixed fee to the lender, charged the same to all borrowers, and is unavoidable; the price of doing business.
Points are pre-paid interest costs used to buy down your interest rate. Paid upfront at closing, discount points will lower your interest rate for the term of your loan, lowering your monthly payment. This cost is optional and choosing this route really depends on how long you plan to stay in your home.
As an example, let’s assume you will be borrowing $200,000. If you are like most borrowers you are driven by the interest rate. You see an advertisement for a 15-year fixed rate mortgage of 3.00% Annual Percentage Rate (APR). When reading the fine print you realize there is a charge of 2 points to buy down the rate. If not buying down the rate, your loan interest rate will be 3.50% APR.
To determine which rate will offer you better savings, you need to know how long it will take to recover your costs. To do this, you need to figure out the difference between payments on the 3.00% APR and the 3.50% APR rates, which is about $48. Then you divide the up-front cost (2 points cost $4,000) by the difference in payment.
For this $200,000 loan, it will take your 83 monthly payments or almost 7 years to recoup the upfront cost.
Basically, if you plan on being in your home for less than the time it takes to recoup your upfront costs, you should choose not to pay points. However, if you plan on being in your home for the long haul it could mean big savings over the life of your loan.
I’m happy to answer any other questions you might have about mortgages, even if you are not an RCB Bank customer. Call or email me at 405-608-5291, firstname.lastname@example.org.
Opinions expressed above are the personal opinions of Kenneth Wohl and meant for generic illustration purposes only. For specific questions regarding your personal lending needs, please call us at 855-BANK-RCB. Member FDIC and Equal Housing Lender.
Kenneth Wohl has over 9 years’ experience in mortgage lending in Edmond. He currently works for RCB Bank as VP of Mortgage. He is a graduate of the University of Central Oklahoma, Leadership Edmond Class XXII, and is a current setting Planning Commissioner for the city of Edmond.