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Why Paying Points These Days Might Not Pay

NEW YORK ( TheStreet) -- Whether to pay points is one of the bigger decisions a mortgage applicant must make, so let's make it simple: These days, paying this unwelcome upfront charge may well be something you can skip with a clear conscience.

But, of course, it depends on the deal and your long-term plans.

There are two reasons paying points might make sense today: Mortgage rates are extraordinarily low, making a future refinancing unlikely; and home prices, while rising, probably won't go up very fast. Those factors mean you could have your new mortgage for quite a few years, providing time for points to pay for themselves and create real savings.

On the other hand, under today's conditions the long-term savings achieved by paying points are often pretty small. Given that, you might have better uses for the thousands of that points might cost.

Points are upfront fees that get you a lower mortgage rate, with each point equal to 1% of the loan amount -- $1,000 for every $100,000 borrowed, for instance. Each point typically lowers the mortgage rate by 0.125 percentage points to 0.25 percentage points.

United Savings Bank of Philadelphia, for example, offers two 30-year, fixed-rate mortgages. Pay no points and the rate is 3.25%. Pay 3 points and it's 2.875%. If you were to borrow $200,000, paying three points would add $6,000 to the closing costs. That's quite a sting, and many borrowers hesitate; it takes the thrill out of getting one of today's cheap mortgages. After all, 3.25% is unbelievably low -- why shell out $6,000 for such a small reduction in rate?

If you can get past that gut reaction, it comes down to simple arithmetic. The lower rate will reduce your monthly payment, and if you have the mortgage long enough, that saving will more than offset the cost of the points.

Using the United Savings example, the Mortgage Points Calculator percentage points shows it would take about a dozen years for those three points to produce savings -- a paltry $229. Sell the house or refinance the loan sooner than that and the points would actually increase your cost of ownership. But if you held the mortgage for the full 30 years, the points would save you $5,224.

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