Nov 28 2007
Settled in? Pay the Points.
Ok, so this isn’t the greatest of topics ever discussed, especially in a failing market where people don’t have money to begin with. But it is ever so important to discuss for those of you that can actually afford to purchase a home in this 21st century. Paying down points, what an interesting thought to consider. Why would this benefit you? You ask. Well, I would assume that most people don’t live in their first home the average length of 6+ years. But when you do get ready to settle down, have kids, and live in a home you will be at for many years, paying down points on a mortgage is not a bad idea.
Here’s why. By paying down 2 points on a 200,000 home you are paying 4,000 to come down a certain percentage rate off of your offered rate. Now the length of your loan typically will last over 6 years, which is much longer than it will take you to pay off your points. So, as an example, using the $200,000 home that we purchased paying down 2 points ($4000) @ 6% loan you save just $514. Now if you are in the home 10 years, you save $3560. This is vs a loan at 6.5% and $196,000.
Now, basically what the points boil down to is .25% per point paid which is 1% of the total loan. If you are going to be in your house for a short period, rarely would paying down points make sense. If you are there for th long haul, by all means, pay the points and reap the rewards down the road. Like they say, cash flow is bliss.
The one thing to keep in mind is the ability to invest the money you are spending up front. With an average return of 7%, you should be able to invest the $4000 and make a lot more in a 10 year period than you would save.