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Question:


I have decided to refinance my home, but someone said that if I’m going to own my home for a long time, I should pay loan origination points to buy down my mortgage rate. Is that good or bad advice?
-Nancy O-Dowyer


Answer:


It all depends on the details – how many points for how much of a rate reduction. Also, it helps to know how long long is. One way to gauge whether you should pay up is to plug the relevant numbers into a loan calculator. There are plenty of them online, such as http://www.loanscalculator.org/. Say you’ve been offered a $300,000, 30-year mortgage at 4.2 percent, which is roughly the going rate these days. Your monthly payments would be $1,467.05. Say your lender is willing to cut the rate to 4 percent if you pay two points, or $6,000, up front. If you add the points to the total loan amount and plug in 4 percent instead of 4.2 percent, you’ll see that you can cut your monthly payment to $1,460.89. Paying the points up front seems like an OK deal, but not a great one. If your lender offered you a 3.9 percent mortgage for two points, it would work out much more in your favor, dropping the monthly payment to $1,443.30. On the other hand, if the two points only bought you a rate reduction to 4.1 percent, you would have to pay $1,478.59 a month and be worse off.
Keep in mind that while this calculation works for whatever dollar and percentage amounts and loan periods you’re considering, your calculations could be meaningless and the cost of paying the points much higher if you end up selling your home long before you expect to. For instance, comparing the 30-year, 4.2 percent loan with the one at 4 percent plus two points, if you move after 10 years, you will have saved about $800 on your monthly payments if you pay the points, but the balance due on the mortgage will be more than $3,000 higher. So make sure that the rate you get by paying the added points is sufficiently low to reduce your monthly payment by a good 2 or 3 percent, just in case you get itchy feet in the next decade or so.

-Conrad de Aenlle



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