To pay points or not to pay points:  Everyone has heard the term “buying down the rate”, or “paying points”, but what does it really mean and should you be paying these?

Before you decide whether you should pay any points you need to know what points actually are, how long you intend to be in the loan and to compare current rates to historical trends.

Points are up front fees paid to obtain a better interest rate on a loan.  One point equals one percent of the loan amount, so if you pay a point up front it will result in a lower interest rate, and a lower monthly payment.

If you are taking out a $200,000 mortgage and decide to pay 1 point that will be a cost of $2,000.  The savings per month on average by paying the point will be around $50 per month.  It will take you about 3 years and 3 months to save the $50 per month to get back your investment of $2,000.  This means if you plan on selling the home within 3 years, do not pay any points.  If you are planning on keeping the home for 10 years it would end up saving you $4,000 over the 10 year period.  When rates are at historical lows it is sensible to pay points only if you plan to live in the home for an extended period of time because it is unlikely rates will go down.

Small extra:

Do you think the Tax credit is working?  45% of all existing home sales last month (October 2009) were purchased by first time buyers.

Photo from Chris Owens.

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Brandon is a branch partner at Alcova Mortgage.  He enjoys doing his taxes, firewalking and competitive eating, but not necessarily in that order.  You can reach him at brandon@alcovamortgage.com, or 877-552-7150.