NEW YORK (MainStreet) – Because mortgage rates are already such a bargain, fewer borrowers are taking the next step of paying “points” to reduce rates even more. But are they cheating themselves out of the proven benefits of paying points?
As with so many financial matters, the short answer is that it depends. But many borrowers would be wise to consider the real savings that points can provide if they plan to keep the home loan long enough.
A recent New York Times story cited data from the Federal Housing Finance Agency showing that in December only 32% of homebuyers paid points, compared to 47% in December 2008. In 1998, the average homebuyer paid 1.8 points. Now it’s down to 0.7 points.
Each point equals 1% of the loan amount, so that one point on a $300,000 loan costs the homeowner $3,000 at closing. In exchange for this upfront payment, the lender reduces the interest rate, typically by about 0.25% per point. That in turn reduces the monthly payment.
For the borrower considering whether to pay points, the most important factor is how long the mortgage will be kept. With a longer period, it’s more likely that points become worth paying, because the monthly payment reduction will eventually offset the cost of the points, and will then start producing real savings on interest payments. This breakeven point may come after five or seven years, or longer depending largely on the base interest rate on the loan.
That math hasn’t changed, so why are so many borrowers choosing not to pay points?