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Will paying points in exchange for a better rate
pay off?
Dear Money Matters,
I am borrowing $85,000 for a new townhouse.
My loan is a 30-year fixed loan at 6.625 percent with 3 points.
I'm paying $2,500 for those points and am wondering if it's worth
it.
Lucy
Dear Lucy,
Your question is a good one for home buyers. The answer depends
on how long you plan to stay in your townhouse. Interest rates aside,
one of the most important considerations in mortgage shopping is
cost of the loan -- that means closing costs, points and any other
fee that may be attached to the overall loan package.
In general, it's always a good idea to hold these
down as much as possible. But spending more upfront for points in
exchange for a lower interest rate can pay off -- provided you keep
the loan long enough for your month-to-month savings to add up.
Ultimately, you want to be saving more with the points than you
would have if you had gone for a higher mortgage rate without the
expense of the points.
To figure out which is the better deal, you have to
run the numbers to see how your deal compares with a no-points loan.
Let's say you can find a 7-percent mortgage with no points. Assuming
that you close on the loan within the next couple of weeks, the
amortization schedule shows that by the end of 2010 you will have
paid $49,324 in interest charges (ain't no misprint, by the way).
By comparison, with the 6.625-percent loan you cite you'll have
paid $46,516 in interest by the same time. That's a savings of some
$2,800, just a bit more than the $2,500 you're laying out in points.
Use Bankrate's mortgage
calculator to run your numbers.
This illustrates how long you'll have to keep
the town house to make up the extra upfront costs. The bigger the
difference in interest rates between two packages, the shorter the
makeup time will be. But, unless you're thinking of putting down
some deep roots for the next eight years or so, the money you're
putting out to pay points is wasted.
-- Posted: April 3, 2002
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