Keller WIlliams Luxury Logo
Home » Should you pay points on your new mortgage loan?

Should you pay points on your new mortgage loan?

by | Jul 9, 2009 | Financing | 0 comments

Recently a client of my was told by his credit union that he “should not pay any points” on the new mortgage he was taking out to buy a home. The reason the credit union suggested the client not pay points was that it added too much to the cost to the loan. It is true that paying a point or points would increase the amount that the client would have to bring to closing, but without knowing and understanding the client’s long term financial and housing goals it could be much more costly to not pay points.

Points are more commonly known as origination fees or discount points. The origination fee is usually the fee the lender earns for originating the loan. Discount points are used specifically to “buy down the rate”. Points are normally equal to 1% of the loan amount. Example: if you have $150,000 loan amount, one point would be equal to $1500. A good rule of thumb is that 1 point is equal to about .25% in rate. Example a rate quote at 5.25% with a 1% origination fee is roughly equal to a rate quote of 5.50% with no origination fees (points). The difference in payment between the 5.25%rate and 5.50% rate is $23.37 per month based on a $150,000 loan amount . If you divide the $1500 (1 point) in closing cost by the monthly payment savings of $23.37 you find that it takes you 64 months (a little over 5 years) to recoup the $1500 investment.

If the client told me that they would only be in the home for a few years (less than 5 years), then it would be not be a wise decision to pay the point as they would not recover the expense during that time period. However, if the client told me that this that last home and loan they would ever own, then the client would save $8413 in interest expense by paying the 1% fee and opting for the lower rate. In the current historically low rate environment, I believe that more and more people will be keeping their loans for much longer time periods as I doubt that we will see rates at these historic lows again for quite some time. So the argument to pay points is made even more so.

The individual at the credit union who told my client not to pay any points should not make those statements without truly understanding the exact circumstances of the client. There are times that a person should pay points. There are times when a person should not pay points. It is all relative to how long they person thinks they will keep the loan and how long they will stay in the property.

Bottom-line: Talk to a true mortgage professional and have them analyze your individual needs and financial goals. Then you’ll know if and when you should pay points on your mortgage loan or not.

By Andy Jorgensen, Owner Platt Park Mortgage

Recent Posts

June Market Statistics for the Kohala Coast

June Market Statistics for the Kohala Coast

Real estate activity along the Kona-Kohala Coast was quiet in June, with only a few condominium sales and no single-family home sales within the resort areas. The exception was Mauna Lani Resort, which was the bright spot with six condominium closings. Mauna Kea...

read more
Featured Big Island Restaurant & Activity for August

Featured Big Island Restaurant & Activity for August

Featured Activity: A Day Trip to the East Side – Explore ʻImiloa Astronomy Center Located on the University of Hawaiʻi-Hilo campus, ʻImiloa Astronomy Center is a must-visit destination for anyone curious about the stars, Hawaiian culture, and the art ofnavigation....

read more
May Sales Statistics for the Big Island Resort Areas

May Sales Statistics for the Big Island Resort Areas

Apart from condominium sales in Mauna Lani and Waikoloa Beach resorts, real estate activity along the Kona-Kohala Coast was light. Mauna Lani Resort led the market with six condominium sales, followed by three in Waikoloa Beach Resort and one in Mauna Kea Resort....

read more
The Leverage Is Yours, For Now.

The Leverage Is Yours, For Now.

By Dan Polimino The slow season in Hawai`i is May 1 through November 1. There is usually is a little bit of an uptick in activity in the summer months of June, July and August based on summer vacation travel. But, for the most part tourism is down, sales transactions...

read more

Recent Listings

Call Now