Savings Secret: Pay Mortgage Points

Paying mortgage points is like dieting or eating your spinach: It's hard to do even if you know deep down that it’s good for you.

But it’s worth considering, especially now. Many people who would have had perfectly good reasons to reject the idea a few years ago might get considerable benefit from paying points in today’s housing and mortgage market.

Points are a form of up-front interest paid when a mortgage closes on a home purchase or refinancing.

Each point is equal to 1% of the loan amount. Three points on a $300,000 loan come to $9,000.

In exchange, the borrower gets a slightly lower interest rate, reducing the monthly payment.

Many people reject this option because that hefty up-front payment really stings, expecially when you're already shelling out thousands for other closing costs. And the benefits of paying points are spread over time.

On a purely mathematical basis, paying points makes sense if you will have the mortgage long enough for the lower monthly payments to offset the cost of the points.

That’s one reason home buyers should seriously consider points today. Because the housing market is shaky in most of the country, it does not make sense to buy a home unless you expect to keep it for seven, eight, even 10 years, else you could lose money on the sale. In many cases, that’s long enough to make the points pay.

The second reason: Mortgage rates are so low today that you many never find it profitable to refinance a loan you take out now. Again, that means you’re likely to have a loan long enough to profit from paying points.

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