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Should I pay points?

The best way to decide whether you should pay points or not is to perform a break- even analysis. This is done as follows:

1. Calculate the cost of the points. Example: 2 points on $100,000 loan is $2000.00.

2. Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50.00 a month.

3. Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not.

4. The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax- deductible, so you realize some savings immediately. On the other hand, when you get a lower payment, your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all so there is little or no effect on the time to break-even period,

If none of the above makes sense, use this simple rule of thumb: If you plan to stay in the house for less than three years, do not pay points. If you plan to stay in the house for more than five years, pay one to two points. If you plan to stay in the house for between three and five years, it does not make a significant difference whether you pay points or not!!!



Kansas Licensed Mortgage Company MC0002252

Missouri Licensed Mortgage Company 11-1849

NMLS # 245406

6801 West 107th Street #103
Overland Park, KS 66212
(913) 599-0001
KS Mortgage Registration # 99-798
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