Should I Pay "Points" to Reduce My Mortgage Payment

One of the questions many of us face when purchasing or refinancing real property is whether we should "buy down" the mortgage payment (interest rate) by paying additional "points" up-front.

Each "point" is one percent of the loan amount and there may be a charge (in points) when applying for a mortgage. For instance, 6.5% at par (no points) or 6.25% with 1/2 "point". In this example, to receive a reduced interest rate, the buyer must pay some money at closing to "get" that reduced rate. In return, the loan's interest rate is reduced for the term of the loan. Generally, in order to buy a reduced rate the mortgage lender charges one "point" for each 1/8 of a percent in interest rate reduction.

"Points" are usually most popular when interest rates are high. Some of you may remember in the late 1970s when rates continued to escalate, finally topping 17% for awhile. But does it make sense to pay "points"? The simple answer is a function of time that you intend to continue to pay on that mortgage. If it cost you $1,000.00 to reduce your interest rate by buying "points" and your mortgage payment is reduced by $20 each month. Then it would take 50 months to break even. But there may be more to the formula so I recommend you visit this site to get the specifics to your particular situation.

Good luck.