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Paying mortgage discount points: a primer |
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How paying points affects your mortgage
payments |
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Based on 30 year fixed, amortized
$200,000 mortgage.
Chart shows cumulative payments, including any points.
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| Discount points |
| Cost of points |
| Rate |
| Monthly principal and
interest |
| Year 1 |
| Year 2 |
| Year 3 |
| Year 4 |
| Year 5 |
| Year 10 |
| Year 20 |
| Year 30 |
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But who keeps a mortgage for 30 years? Hardly anyone
anymore. Because it takes years to break even -- for the accumulated
monthly savings to catch up with the upfront payment of discount
points -- mortgage consultant Jim Sahnger isn't a big fan of paying
points.
Sahnger, of Palm Beach Financial Network in Stuart,
Fla., draws the hypothetical case of someone getting a $300,000
mortgage and trying to decide whether to pay two discount points,
or $6,000. "The average homeowner often has better use for
that $6,000, such as for appliances and curtains," he says.
It doesn't make a lot of financial sense to pay the discount points,
then turn around and charge furniture and yard equipment to a high-rate
credit card.
Simple break-even formula
The simplest way to calculate the break-even point is to ask the
lender how much you would save per month by paying a certain number
of discount points. William Noll, mortgage consultant for Wells
Fargo Home Mortgage in Hershey, Pa., likes to do it this way. He
brings up a hypothetical example where $1,000 in discount points
reduces the monthly payment by $15. He divides $1,000 by $15, for
a break-even point of 66.6 months, or roughly five-and-a-half years.
Noll doesn't think it's worth the bother if a buyer
plans to keep the mortgage for only a little longer than the break-even
period. Better to put the money in a certificate of deposit, he
says. "Unless the customer tells me he's maybe going to be
in the home maybe 10 years or more, I generally don't recommend
points," he says. "But I leave it up to them."
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