Paying points to trim rate only works if you stay put


December 21, 2007|By JAMIE SMITH HOPKINS

If you've paid a bit of attention to mortgage jargon, you might have the same question a colleague put to me: What the heck is a point?

It's an upfront fee to get a lower interest rate. The more discount points you pay for, the lower the rate - but don't assume it's worth it.

Allison Vail with LendingTree, the online company that connects borrowers with lenders, says you need to figure out if time is on your side.

She notes that paying for one discount point typically means coughing up money equal to 1 percent of the amount you're borrowing in return for a quarter-percentage-point off the rate.

Here's the example she offered:

Say you're borrowing $100,000. (Yes, yes, I know most homes around here are a lot more expensive - stay with me here.) If you get a 30-year fixed-rate mortgage with a 7 percent interest rate, you're paying $665 a month in principal and interest.

If you buy two points, your interest rate drops to 6.5 percent. That means payments of $632 a month.

A $33 savings every month: Better than nothing, right? Not if you leave or refinance before five years are up. Then you won't break even on the $2,000 upfront cost of the points. (Here's the math: 2,000 divided by 33 equals 60.6 months - or about five years.)

"So if you plan on being there for a long time, that's great, because you're going to have an interest-rate savings over the life of the loan," Vail said. "But if you plan on leaving, discount points may not be a good option. ... A little bit of looking into the crystal ball, I guess."

Readers of the Wonk blog, who get to see this advice first, noted that you'll want to consider other things, too. You'll speed up the payoff if you itemize your taxes and deduct those points. On the other hand, if you skip the points, invest the $2,000 and manage to get a return of 8 percent a year, you'll have nearly $3,000 at the end of five years.

Find Jamie's blog at realestatewonk.

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