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Should You Ever Pay Points?

Written by Posted On Thursday, 29 April 2021 00:00

When beginning to get interest rate quotes from mortgage lenders, it can get pretty confusing pretty quickly. Consumers can sometimes think lenders have just one interest rate for each loan program. After all, rate advertisements show just one rate along with the calculated APR. The fact is, lenders offer an array of interest rate choices for the exact same loan program. 

A 30 year fixed rate loan program can offer several rate choices in 0.125% increments, not just one. The lender doesn’t really care one way or the other which rate you choose, the ultimate net to the lender is pretty much the same. The difference is whether or not you choose to ‘buy down’ the rate by paying discount points, or simply ‘points.’

A point is actually a form of prepaid interest. Paying the lender interest up front in the form of points results in a lower rate on the loan. But it’s up to you whether or not to pay points. Again, the lender doesn’t care which rate you choose. Some rates require discount point payment while other rates do not. A so-called ‘no point’ loan means just that. The rate doesn’t require any points to be paid. 

If you want a lower rate, you can pay points. Your loan officer will provide you with various rate/point combinations. At some stage, all of these numbers can get a bit confusing. That said, should you consider paying points to lower your rate? That’s up to you of course, but personally I wouldn’t recommend it. However, it’s relatively easy to determine whether or not paying points makes financial sense.

Let’s look at a scenario. Let’s say someone is borrowing $300,000 and wants a 30 year fixed rate loan. In the process of getting rate quotes, a lender quotes a 30 year fixed rate of 3.00% with no points and 2.75% with one point. The 3.00% results in a monthly payment of $1,264 while the 2.75% rate gives a payment of $1,224, or a difference of $40 per month. It’s probably evident at this stage that the point won’t really be a good investment. 

If you run the numbers, you’ll find that paying $3,000 to save $40 might not make much sense in this scenario. To get that $3,000 investment back, it would take 75 months, or a little more than six years, to get a return on that money.

When you speak to a loan officer to get rate quotes, have the loan officer calculate the ‘return’ of paying discount points. If the return is say, two years and you intend to own the property longer than two years, it might very well make sense. But if would take much longer than that for the lower rate to provide a direct benefit, you might want to reconsider paying any points at all. Again, the lender doesn’t care and neither does your loan officer. You’re in the driver’s seat here. Just be careful not to drown in a sea of numbers.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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