WHEN TO PAY POINTS
Lenders give to buyers the option of paying points in order to reduce, or "buy down" their mortgage rate. Each point is equal to one percent of the loan amount. On a $180,000 loan, one point costs $1,800. Borrowers strapped for closing cash can benefit from low and no-point loans. But these mortgages have higher interest rates to make up for the lower fee.
Using the Annual Percentage Rate (APR) to compare different loans can be misleading, because that calculation assumes the borrower will stay in a house for the length of the loan. Use the table below to see when they are getting an advantage by paying points.
Here's how to figure out how long you need to stay in a home for the interest rate reduction to justify the points paid.
- What is the difference in points between two 30-year, fixed-rate loans you're considering? Find that number across the top of the table.
- Now locate the rate difference in the two mortgages in the column down the left side. Where these two points intersect on the table is the break-even time in years.
For example, if you pay one point extra and receive a rate reduction of half a percent, you'll need to stay in that home 2.3 years in order to recoup what you paid in points. If you live longer in that home then you'll come out ahead!
| Interest Rate Reduction | .25 | .5 | .75 | 1.0 | 1.25 | 1.5 | 1.75 | 2.0 | 2.25 | 2.5 | 2.75 | 3.0 | 3.25 |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| .125% | 2.3 yrs | 5.3 | 10 | 23.5 | |||||||||
| .25% | 1.1 | 2.3 | 3.7 | 5.3 | 7.2 | 10 | 13.5 | 21 | |||||
| .375% | 0.7 | 1.5 | 2.2 | 3.1 | 4.2 | 5.3 | 6.5 | 8 | 9.8 | 12 | 15 | 21 | |
| .5% | 0.5 | 1.1 | 1.6 | 2.3 | 2.9 | 3.6 | 4.4 | 5.3 | 6.2 | 7.2 | 8.5 | 9.8 | 11.4 |
| .625% | 0.4 | 0.8 | 1.3 | 1.8 | 2.3 | 2.8 | 3.3 | 3.9 | 4.6 | 5.3 | 6 | 6.8 | 7.7 |
| .75% | 0.3 | 0.7 | 1.1 | 1.4 | 1.8 | 2.3 | 2.7 | 3.2 | 3.6 | 4.1 | 4.7 | 5.2 | 5.9 |
| .875% | 0.3 | 0.6 | 0.9 | 1.2 | 1.6 | 1.9 | 2.3 | 2.6 | 3 | 3.4 | 3.8 | 4.3 | 4.7 |
| 1.0% | 0.3 | 0.5 | 0.8 | 1.1 | 1.3 | 1.6 | 2 | 2.3 | 2.6 | 2.9 | 3.3 | 3.6 | 4 |
