What’s the Point of Paying Points?

Home buyers often want to know whether or not they should pay points on a loan. The truth is, each borrower needs to consider his/her own unique needs to answer this question. The definition of a point is equal to one percent of the loan amount. For example, on a $500,000 loan, one point would equal $5,000.  Paying one point will typically lower your interest rate by about ¼ %, and it takes about four to five years to recoup the cost of that point in the form of interest savings. And remember, points may be tax-deductible, which will effectively accelerate your return on investment.  So in most cases, if your are fairly certain that you will stay in your home for more than 4 years, paying a point is a worthy investment.  Here is an example:

-       Loan Amount: $500,000

-       Interest Rate (No Points): 5.00%

-       Interest Rate (1 Point): 4.75%

-       Annual Interest Savings by Paying 1 point = $1,250 (.25% X $500,000)

-       Cost of Point = $5,000 (1% X $500,000)

-       Time to Recover 1 point ($5,000) = 4 Years ($5,000/$1,250)*

A mortgage broker or loan officer should be able to provide a home buyer with options of paying points or no points and offer strategic advice as to which option best suits the goals and risk-tolerance levels of the home buyer.

* This timeframe could accelerate if a CPA allows for a tax deduction of the $5,000