As interest rates increase, people start thinking about paying points to lower their interest rate. Does it make sense to do that? The answer is sometimes yes, sometimes no. Every situation is different and so it’s worth looking into.
A point is equal to 1% of your mortgage amount – so if your mortgage is $200,000, one point is going to be $2000. So let’s say today’s interest rate is 4.625% at par – in other words, no points to get 4.625%. But if you want to lower the rate, what would it cost? The amount will vary daily but for example, let’s say it’s .50% (half a point) to get to 4.5%. That would cost $1000 on that $200,000 mortgage. Your principal and interest payment at 4.625% would be $1028, but at 4.5% it would be $1013, a savings of $15/month. Maybe it’s one point (1%) to get to 4.375%. That would cost you $2000, but your monthly payment would be $999, that would save you $29/month over the 4.625% rate.
So what makes sense to do? It truly will depend on how long you plan to be in the home – and how long you think you will keep this mortgage. Some people plan to pay down the principal faster or maybe you know you have annual bonuses that you will use to pay down your mortgage. Or maybe you plan to be in the house for 5-7 years. Look at what it costs you to get the lower rate and how much you save. So in the example above, if I am saving $29/month, that is $348/year. However it cost me $2000 to do that. So at $348/year, it takes six years to recoup the initial investment of $2000. So if I sell the house in five years, I will have lost money. However if I am there over six years, I am ahead. Does that make sense? If I am saving $15/month, that’s $180/year. It cost me $1000, and it will still take almost six years to pay that back.
So when you are looking at interest rates, think about how long you plan to be in the home. What are your goals? Do you plan to pay extra? Think about how long you will keep this mortgage. Do you plan to refinance at some point for home improvements or something else? We never know what will happen to interest rates, so maybe they will drop again and you may refinance to a lower rate. Talk to your loan officer and decide what makes the most sense for you. It may make more sense to not pay points and keep the higher rate. Everyone is different – you need to decide what makes sense for your own situation!
Also remember – rates are increasing but these rates are still really good!! We are just spoiled!!! In the 80’s, rates were 16-18%!!! That makes 4.5-5% look great!! The rates I used in the examples above are truly just examples – not where necessarily where rates are today, but just numbers to give you an idea of what the costs could be and how to calculate the differences. Ask your loan officer about rates and fees, then decide what works for you!
Leslie Vanderwerf, NMLS ID#335509, American Mortgage & Equity Consultants, Inc., An Equal Housing Lender, NMLS#150953 – Email – Website
