Should you pay points to lower your mortgage rate?

When you lock in your interest rate on your new mortgage, you are usually given the option to pay points. Does that make sense? In Minnesota, we usually call  it an origination fee and it used to be very typical to pay a 1% origination fee. So if you have  a $200,000 mortgage and are paying a 1% origination fee, your closing costs just increased by $2000. Does that make sense?

I always talk to my clients about their options -usually give them 2-3 choices for interest rates and the cost to get that rate. Then we look at how long they need to stay in the home to recoup the cost of that interest rate. Interest rates are low right now – you may be able to get a 3% 30 yr fixed rate for no cost-  that’s awesome! But what if you could get 2.875% or maybe even 2.75%? Is it worth it? You need to look at the cost and how long you think you will keep that mortgage and stay in the home. If you think you will only be in your home for 3-5 more years, it probably doesn’t make sense to pay anything to lower your rate.

Here is the calculation – let’s say you have a 3% rate at no cost, but it will cost you 1% to lower the rate to 2.75% and you have a $200,000 mortgage. The principal and interest payment on that loan is $843/month at 3%. The principal and interest payment at 2.75% is $816. You save $26.50/month with the lower rate. However it will cost you $2000 to get that lower rate. You need to stay in the home for just over 6 years to recoup that $2000 cost. In some cases, it may be a larger savings or possibly cost you much less to lower the rate – so then it may make sense to pay the fee.

What makes sense for you? First of all, you need to think about how long you will keep your home. Then decide if it’s worth spending money to lower your payment. Ask your loan officer to help you figure out what the savings will be and how long it will take you to recoup the cost. Then you can decide what makes sense for you!

Leslie Vanderwerf,  NMLS ID#335509, Everett Financial Inc, dba Supreme Lending, An Equal Housing Lender, NMLS#2129 – Email – Website