When I am talking to clients about interest rates, I always give them a choice. In Minnesota we used to always charge a 1% origination fee (basically it was paying 1 point). That has gone away although there are some lenders that still do this. Now I talk about interest rates and whether you want to pay to lower your rate. This is always your choice.
Paying discount points can be a great way to lower your interest rate and your monthly payment. However, you need to make sure you keep the mortgage long enough to recoup the cost of paying points.
Here is an example:
- Loan amount: $250,000
- Original interest rate: 3.50%
- Cost of one discount point: $2500 (added to your closing costs)
- New interest rate: 3.25% (these interest rates are an example only, your rates will vary)
In this example you would save $35/month on your payment. Because it will cost you $2500 to get that rate, it may not make sense to do this. It will take you about 6 years to recoup the $2500 cost so you need to decide how long you will live in the home and if the extra money is worthwhile. Sometimes it’s not how long you will live there but will you refinance your mortgage within 6 years.
Here is another example:
- Loan amount: $250,000
- Original interest rate: 3.25%
- Cost to pay rate down to 3.125%: $500
In this case you will save about $17/month and it will take about 2.5 years to recoup the $500. More than likely this does make sense.
Paying points may make sense but it does depend on your situation. Find out the cost of paying points, how much you will save and then think about how long you will keep this mortgage and stay in the home. Usually if the payback is less than 5 years, it may make sense. Some buyers know they will pay extra or maybe they know they will move sooner than the payback time. In those cases, you need to decide if it’s worth the money to lower your rate.
The most important thing you can do is to ask your loan officer about options and then make a decision that is right for you. It may also depend on how much money you have available to use for closing costs. If the seller is paying your closing costs and you have extra money left over, then you definitely want to look at paying points to lower your rate.
Everyone’s situation is different, so talk to your loan officer and figure out what makes the most sense for you!
Leslie Vanderwerf, NMLS ID#335509, Cross Country Mortgage LLC, An Equal Housing Lender, NMLS#3029 – Email – Website