May 3, 2017
Points are relatively common in mortgage lending. Sometimes
referred to as “discount points” because paying points discounts the interest
rate, points are nothing more than a form of prepaid interest given to the
lender at the settlement table instead of paying additional interest each month
as part of your mortgage payment. Whether or not to pay points is completely up
to you because the lender really has no preference one way or the other. You
either pay interest over time or pay a portion of it upfront. But when you’re
refinancing, should paying points even be in the discussion?
Probably not and here’s why. When you’re considering a
refinance, the math typically suggests it’s a good thing or maybe not so good.
A refinance just like a purchase money loan has associated closing costs
involved and these costs need to be considered before making the move. For
example, let’s say you’re thinking of refinancing because rates have fallen.
Closing costs add up to around $4,000 and lowering your rate would reduce your
payment by $100. If you divide the savings into the costs that means you would
need to keep the mortgage for at least 40 months.
So called “no closing cost” mortgages still have closing
costs it’s only that the lender has adjusted the rate upwards enough to provide
a lender credit to offset part or all of your fees. There is a cost involved
it’s just in the form of a higher rate.
Now what about the points involved? Typically a loan officer
will suggest not paying any points because the additional point won’t lower the
payment enough to offset the points paid. On a $250,000 loan amount, one point
is $2,500 and will lower a 30 year rate by about 0.25%, or $36. If you divide
the savings into $2,500 the result is almost six years. That’s far too long for
the point to be of any benefit. You’re probably better off taking that same
amount an applying it toward your principal balance, but not paying points
during a refinance.
For more information or questions about mortgage loans, please call (855) 757-8748.