When the question of paying points comes up, most borrowers will immediately say no. After all, no one wants to pay thousands of dollars on top of closing costs. To answer the question of points you first need to calculate what kind of savings it means to you.
Every lender has a beginning rate with zero points that they can offer you. You will also be given an opportunity to buy down the rate by paying the lender points that are added on top of the costs to close your loan. Find out from your lender how much lower of a rate you get if you were to buy it down by paying one point. While you're at it, get the rate for paying two points and so on. On every rate sheet there will be a point where you get maximum bang for your buck, as well as a point where is doesn't make any more sense to pay any more points.
If you are borrowing $300,000 your payment with no points will be about $1,850. If you were to pay two points (2%) and be able to lower your rate a full percent, say from four percent to three, your new payment would be about $1,700. Even though your loan amount would increase $6,000 to accommodate the 2 points (2%), you're going to be surprised at the results. Just by your willingness to pay the 2% (2 points) you save yourself about $150 each month. That adds up to $54,000 in savings over the life of a thirty year loan. When you look at it this way, why would you not pay any points?
Whether you are purchasing a home or refinancing an existing one, if you only plan on staying in the home a few years you may not want to pay points. You will just have to calculate it. On that same loan of $306,000 that saves you $150 a month, you will have to stay in the home for 40 months to make back the $6,000 the points cost you. After that the rest is pure savings. If you're going to move in two years you may want to pay just one point, maybe less. To do the calculations you need to use a mortgage calculator. If you don't have one you can buy one anywhere that sells calculators, or you can easily Google free mortgage calculators, and use that one.
When you are doing your own calculations make sure you increase the loan amount by the amount the points cost unless you are going to pay for the points out of your pocket. People don't usually do that on a refinance. It's usually done when someone is buying a house. Just start inputting the numbers until you find the biggest savings at the lowest cost.
So, the next time you are asked to pay points, do the math and see if it will save you money on your loan; it usually does. Good luck and happy borrowing.
