There are a LOT of choices to make when you shop for a home loan. one of the more complicated ones is whether it is worth it to pay points to “buy down” your loan.
To Pay or Not to Pay
All your loan decisions are about paying as little as you can for the loan that fits your needs best. That it the case with paying for discount points too.
Here is a website with a calculator set up to show you the difference in out-of-pocket costs to you for a few scenarios. Check it out and see how the costs change, it will show you how many months you have to keep the loan to break even on the cost.
*You will want to have a few loan quotes in your hand so you can use real numbers for the calculation.
What are Points?
What are Points you say? They are a percentage of the loan amount that you can agree to pay up front when you sign the paperwork. In exchange the lender offers you a lower interest rate. I usually explain it by saying that you are paying some interest to the lender up front instead of spreading it out. (A point is equal to 1 percent of the loan amount.)
There are situations where this will save you money
- Someone else is willing to pay points for you: Maybe you are moving for work and the new company will pay points on your loan, maybe your parents are willing to help you with your home purchase, or perhaps you negotiated with your seller to pay points for you instead of dropping the house price by another few thousand dollars. If someone else can pay points for you there is almost no downside.
- You will be in the home for a long time: You can calculate the cost of the points versus the change in your payment… then figure out how many years it will take to break even. If you plan to keep the loan for longer than the break-even point you are likely to come out ahead. Be careful here though, life has surprises and although you plan to live there for 30 years you may decide to move sooner.
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