Home Loans - Should I Pay Points
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Home Loans: Should You Pay Points?
Understanding Points
Choosing whether to pay points on your home loan is an important decision. But first, let’s clarify what points are: a point is 1% of your loan amount. For instance, one point on a $100,000 loan equals $1,000, whereas on a $150,000 loan, it equals $1,500.
When Do You Encounter Points?
Locking in Your Interest Rate
The first time you may consider paying points is when deciding whether to lock in your interest rate. You might pay a fraction of a point, one point, or multiple points to secure your rate for a set period, usually 30 to 60 days.
If you don’t lock in, and interest rates rise before you close, you could face a higher rate. Your loan officer can offer an extended lock period if you pay points. It's crucial to stay informed about current interest rate trends. If rates are rising, paying points to lock in your rate could save money in the long run.
Calculating the Costs
Your loan officer can provide an estimate of future rates, allowing you to compare potential savings against the cost of paying points. A simple calculation will show if the savings outweigh the cost.
Reducing Your Interest Rate
The second instance is when you receive your loan package details. You might be offered a lower interest rate in exchange for paying points. For example, you may reduce your rate from 6% to 5.75% by paying one point, or 5.5% by paying two. Decide if the savings over time exceed the cost of the points.
Making the Decision
To make an informed choice, consider how long you plan to stay in the home or might refinance. Calculate the total mortgage payments over this period at both interest rates. If the savings from a lower rate surpass the cost of points, it may be worthwhile. However, if savings are minimal, skipping the points could be better.
Conclusion
Ultimately, the decision to pay points depends on your future plans and financial goals. By understanding your timeline and expected savings, you'll be better equipped to decide whether paying points is right for you.
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