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Home Mortgages: Does It Ever Make Sense to Pay Points?

Interest rates on home mortgages are often quoted with and without points. A point equals one percent of the amount you are financing. This means that on a $150,000 mortgage, one point is $1500.00 and two points would be $3,000. These points are in addition to whatever other closing costs you might have.

I checked interest rates today in our state for 30-year fixed-rate mortgages and found a number of companies offering mortgages with no points. Here are a few examples (payment and interest only - no taxes or insurance).

0 Points 5.625 percent interest, $863 per month payment

0 Points, 5.750 percent interest, $875 per month payment

0 Points, 6.250 percent interesxt, $924 per month payment

Now, let's compare these with mortgages requiring points.

1 Point, 5.250 percent interest rate, $826 per month payment

2 Points 5.0 percent interest rate, $805 per month payment

2 Points, 5.125 percent interest rate, $817 per month payment

What this makes clear is that there is an inverse ratio between the number of points charged by the lender and the interest rate on the mortgage. In other words, the more points you pay, the less your interest rate will be. This means that when you pay points you are basically buying down your interest rate and, thus, your monthly payment. In fact, one point is usually equal to ¼ percent in the interest rate. So, as you can see from these charts, paying two points on a 30-year fixed-rate mortgage could save you as much as $50 a month or $600 a year.

So doesn't it make sense to always pay points?

Not necessarily.

The important thing in deciding whether or not to pay points is the number of years you intend to stay in that house before you either refinance or buy another. Do the math and you will see that the longer you intend to stay in that house, the more sense it makes to pay points.

Let's go back to that two point example where the interest rate is an even five percent and the monthy payment $805. If your best deal in a no-points mortgage is 5.625 percent, yielding a payment of $863, then paying two points will save you $58 a month or $696.00 a year.

However, you must remember that on a $150,000 mortgage, two points equals $3,000. So you would need to say in that house for almost 4.5 years in order to just break even on the cost of the points.

So in answer to the question, should you pay points, the answer is a a strong maybe. If you intend to stay in the same house for seven or ten years, the answer is probably "yes." If you believe you will refinance or sell the home in less than four years, the answer is that you will be money ahead to skip the points and pay the higher interest rate.

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