The Case Against Paying Points
Below is a MRR and PLR article in category Finance -> subcategory Other.
The Case Against Paying Mortgage Points
Overview
While paying mortgage points can lower your interest rate, it might not always be the best financial decision. If you're short on cash, paying points can feel unattainable. Is it necessary to pay points?
Understanding Mortgage Points
Mortgage points, also known as discount points or origination fees, are payments made to the lender at closing, equal to one percent of the loan amount. They were introduced in the early 1980s to help buyers during a period of high 15% mortgage rates by offering lower interest rates in exchange for upfront fees.
Why Mortgage Points Might Not Make Sense Anymore
Today, mortgage rates are much lower, around 7%, reducing the necessity for points. For a $192,000 home with a 30-year fixed-rate mortgage at 6.5% with two points, you’d need to pay $3,840 at closing.
Comparing Options
Compare this with a 7% interest rate mortgage without points:
- 6.5% Mortgage: Monthly payment of $1,207
- 7% Mortgage: Monthly payment of $1,270
The monthly difference is $63. To recoup the $3,840 paid in points, you'd need about 61 months, or five years and one month, just to break even. If you invest that money in a bank account earning 3% interest, you’d get an additional $10 per month, extending your payback period to six years.
Considering Your Circumstances
Most people won’t stay in a home longer than six years, making it difficult to recover the cost of points. Plus, with home prices rising, finding extra cash for points is challenging for many.
Conclusion
If the seller offers to cover the points, it’s a rare but welcome offer. Otherwise, if you’re unsure about staying in the home long enough to recover the cost, opting for a mortgage without points might be the better choice.
In today’s market, many lenders offer options with lower down payments, acknowledging the difficulty of saving large amounts upfront. Consider your financial situation and future plans before deciding on mortgage points.
You can find the original non-AI version of this article here: The Case Against Paying Points.
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