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Should I Pay Points?
Loan rates typically are quoted in terms of rates and points, e.g., "5.75% at 0 points" or "5.50% at 1 point", or even "5.25% at 2 points". Points are fees you pay in advance to receive a lower interest rate in the future. One point equals 1% of the loan amount. When deciding whether you should pay points, keep in mind that the more points you pay, the lower the rate.
Many people who purchased homes before 2008 did not pay points; these days, most lenders are pricing their loans so it's appealing to pay the points -- i.e., the rate is a lot better than it used to be when you pay at least one point.
Why have lenders chosen to change their pricing model? Frankly, because they lose money when people quickly refinance in and out of loans -- lenders do not recoup their costs of lending or turn a profit until three or four years into a loan. As a result, they are now "incentivizing" borrowers to invest in their mortgages upfront, hoping they will not be so quick to refinance if rates drop. You should now seriously consider whether it makes sense for you to pay points.
You can look at this another way: banks now want to take their profit upfront; they don't want to wait to see whether your loan will perform profitably in a few years.
Do I Have To Pay Points?
You will always have the choice to pay points or not to pay points. Generally the rate is about .25% lower if you pay 1 point, and .5% lower if you pay 2 points. If you can't afford to pay points upfront, that's fine; you will pay a slightly higher rate, but will save money on your closing costs. Before recommending that you should pay points, I always perform an analysis to be sure that you will save enough in your monthly payments to make that point pay off over time.
Who Are the Points Paid To?
The points will either be paid directly to the lender (in which case they are called "discount points"), or to the mortgage broker (in which case they are called "origination fees"), or possibly a combination of both.
For example, if I quote a rate of 5.25% at 1.25 points, you might be paying .25 points to the lender as discount points and 1.0 point to Guarantee Mortgage as a broker origination fee. Either way, you have prepaid on your mortgage in exchange for a lower rate over time. We charge our commission, or profit, upfront just like the banks do. (If you obtain a "0 points" loan from us, the lender pays the 1% origination fee directly to us.)
What about your friendly neighborhood bank? Will they charge fewer points for the same rate? The answer is no. Banks are still in the business of making money, and they are not giving anything away these days -- not even toasters! If the going rate for a 30 year fixed conforming loan of $400,000 is 5.25% at 1 point, the same rate and points will apply whether you obtain your loan from a mortgage broker or a bank. In fact, it is always our goal to find you a better rate or lower points than you would find at your local bank.
What Are The Advantages of Paying Points?
You will obtain a lower interest rate, reducing your monthly payments.
You could save thousands of dollars in interest if you plan to stay in the property for a long time.
Points are tax deductible in the year you pay them.
What Are The Disadvantages of Paying Points?
You may not save enough in your monthly payments to recoup the points you paid in advance.
You may not be in the home long enough to recoup the points you paid.
If you refinance into a new loan within the first few years, the points you paid will not be recouped.
You may not be able to afford to pay points (it’’s not unusual for people to use all of their savings to cover the down payment and closing costs!)
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