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Paying mortgage discount points: a primer

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How paying points affects your mortgage payments
Based on 30 year fixed, amortized $200,000 mortgage.
Chart shows cumulative payments, including any points.
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
  source: Bankrate.com

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.
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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."

Bankrate.com's corrections policy -- Posted: Jan. 26, 2006
 
 
More stories by Holden Lewis
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