Should I Pay Points to Buy Down My Mortgage Rate?

Should I Pay Points to Buy Down My Mortgage Rate?

You're getting a mortgage and your lender gives you two choices.

Pay the standard rate.

Or pay additional money upfront to get a lower rate.

Which one should you choose?

My answer:

Show me the math.

WHAT ARE MORTGAGE POINTS?

Discount points are money you pay upfront in exchange for a lower
mortgage interest rate.

How much a point costs and how much it changes your rate depends on
the loan and current pricing, so this is where your lender needs to
give you the exact numbers.

But the financial question is pretty simple:

How much am I spending today, and how long will it take the monthly
savings to pay me back?

THE BREAK-EVEN POINT MATTERS

Let's say buying down your rate costs several thousand dollars.

In exchange, your monthly payment goes down.

Great.

Now divide the upfront cost by the monthly savings.

That gives you a rough idea of how long you need to keep that mortgage
before you've recovered the cost.

If the break-even point is four years and you expect to own the house for ten?

Worth looking at.

If you think you'll sell in two years?

Different conversation.

And if you refinance before reaching the break-even point, you may not
have received the full benefit you expected from the money you paid
upfront.

WHAT IF THE SELLER IS PAYING?

Now it gets more interesting.

If we've negotiated seller concessions and your lender says some of
those funds can be used toward allowable financing costs, paying
points may look different than when the money is coming directly out
of your pocket.

That's why I don't evaluate the rate by itself.

Where is the money coming from?

How much are we spending?

What's the monthly savings?

What's the break-even point?

JILL’S INSIDER TIP

Don't pay thousands of dollars today solely because you think you know
what mortgage rates will do tomorrow.

Nobody knows that with certainty.

Have your lender show you the options side by side.

Then decide based on the numbers you know today.

JILL’S FINAL TAKE

A lower mortgage rate sounds better.

But lower isn't automatically cheaper.

If you're paying thousands upfront to get it, that cost belongs in the equation.

Sometimes paying points makes excellent financial sense.

Sometimes keeping the cash makes more sense.

And sometimes negotiating seller money toward the financing changes the answer.

Show me the whole deal.

Then we decide.

Buying in Arizona and trying to compare mortgage options? I'll work
with your lender so we can see how the financing fits into the real
estate negotiation.

602-513-6209
JillHamilton.com
Jill Hamilton, REALTOR®
Buy Sell With Jill | West USA Realty