Recently a client of my was told by his credit union that he â€œshould not pay any pointsâ€ on the new mortgage he was taking out to buy a home. The reason the credit union suggested the client not pay points was that it added too much to the cost to the loan. It is true that paying a point or points would increase the amount that the client would have to bring to closing, but without knowing and understanding the clientâ€™s long term financial and housing goals it could be much more costly to not pay points.
Points are more commonly known as origination fees or discount points. The origination fee is usually the fee the lender earns for originating the loan. Discount points are used specifically to â€œbuy down the rateâ€. Points are normally equal to 1% of the loan amount. Example: if you have $150,000 loan amount, one point would be equal to $1500. A good rule of thumb is that 1 point is equal to about .25% in rate. Example a rate quote at 5.25% with a 1% origination fee is roughly equal to a rate quote of 5.50% with no origination fees (points). The difference in payment between the 5.25%rate and 5.50% rate is $23.37 per month based on a $150,000 loan amount . If you divide the $1500 (1 point) in closing cost by the monthly payment savings of $23.37 you find that it takes you 64 months (a little over 5 years) to recoup the $1500 investment.
If the client told me that they would only be in the home for a few years (less than 5 years), then it would be not be a wise decision to pay the point as they would not recover the expense during that time period. However, if the client told me that this that last home and loan they would ever own, then the client would save $8413 in interest expense by paying the 1% fee and opting for the lower rate. In the current historically low rate environment, I believe that more and more people will be keeping their loans for much longer time periods as I doubt that we will see rates at these historic lows again for quite some time. So the argument to pay points is made even more so.
The individual at the credit union who told my client not to pay any points should not make those statements without truly understanding the exact circumstances of the client. There are times that a person should pay points. There are times when a person should not pay points. It is all relative to how long they person thinks they will keep the loan and how long they will stay in the property.
Bottom-line: Talk to a true mortgage professional and have them analyze your individual needs and financial goals. Then youâ€™ll know if and when you should pay points on your mortgage loan or not.
By Andy Jorgensen, Owner Platt Park Mortgage