DONE FOR YOU - WHAT ARE POINTS AND SHOULD YOU PAY THEM
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**What Are Mortgage Loan Points, and Should You Pay Them?**
If you’ve ever looked into getting a mortgage loan, you might have heard the term “points.” But what exactly are mortgage points, and how do they work? Let’s break it down in a way that’s easy to understand.
### What Are Mortgage Points?
Mortgage points are fees you pay to your lender when you take out a loan. They are also called “discount points.” Each point equals 1% of the total loan amount. For example:
- If your loan is $200,000, one point would cost you $2,000.
- If your loan is $300,000, one point would cost you $3,000.
These points are not part of your down payment or closing costs. Instead, they are an extra fee you pay upfront to get a lower interest rate on your mortgage. This is called “buying down the rate.”
### How Do Points Work?
Let’s say you’re borrowing $200,000, and the interest rate your lender offers is 6%. If you pay one point (remember, that’s $2,000), your interest rate might drop to 5.75%. If you pay two points ($4,000), it might drop to 5.5%.
A lower interest rate means your monthly mortgage payment will be smaller, and you’ll pay less interest over the life of the loan. But paying points upfront also means spending more money when you close on the loan. So, is it worth it? Let’s look at some examples.
### Example 1: Paying Points Saves You Money Over Time
Imagine you’re buying a house with a $200,000 loan, and you plan to stay in the house for at least 10 years. Your lender offers you two options:
1. **No points:** 6% interest rate. Monthly payment = $1,199. Total interest over 10 years = $115,800.
2. **One point ($2,000):** 5.75% interest rate. Monthly payment = $1,167. Total interest over 10 years = $111,900.
By paying one point, you save $32 per month. Over 10 years, you save $3,900 in interest. Since you paid $2,000 upfront, your total savings are $1,900. In this case, paying the point is a good idea.
### Example 2: Paying Points Doesn’t Pay Off
Now let’s say you’re buying the same house, but you only plan to stay there for 3 years. Here’s how the numbers look:
1. **No points:** 6% interest rate. Monthly payment = $1,199. Total interest over 3 years = $34,800.
2. **One point ($2,000):** 5.75% interest rate. Monthly payment = $1,167. Total interest over 3 years = $33,900.
In this case, you save $900 in interest, but you spent $2,000 to buy the point. That means you actually lose $1,100. If you don’t plan to stay in the house long, paying points may not be worth it.
### Pros and Cons of Paying Points
Here’s a simple list to help you decide if paying points is right for you.
**Pros:**
- You get a lower interest rate.
- Your monthly payment will be smaller.
- You save money in the long run if you stay in the house for many years.
**Cons:**
- You have to pay more money upfront.
- If you sell the house or refinance the loan too soon, you might not save enough to make it worth it.
- You might not have enough cash to pay points and still cover other costs like your down payment or moving expenses.
### How to Decide
Before you decide to pay points, ask yourself these questions:
1. **How long will I stay in the house?** If you plan to stay for a long time, paying points might be a smart move. If you’re not sure or plan to move soon, skip the points.
2. **Can I afford it?** Paying points can save you money, but only if you can afford the upfront cost. Don’t stretch your budget too thin.
3. **What’s my break-even point?** This is the amount of time it takes to recover the cost of the points through monthly savings. Your lender can help you calculate this.
### Final Thoughts
Mortgage points can be a helpful tool to save money, but they’re not for everyone. Take the time to crunch the numbers and think about your long-term plans. If you’re staying in your home for many years and can afford the upfront cost, paying points might be a great choice. But if you’re planning to move or refinance soon, you might want to skip them.
Remember, there’s no one-size-fits-all answer. Talk to your lender, ask questions, and make the choice that works best for you.