Will You Pay Points to For a Real Estate Loan??

With mortgage rates on the decline, many home buyers are again on the lookout for their next home, or perhaps a refinance of their current home. When you obtain your real estate mortgage, you will usually have an option to pay points or "buy down" in an effort to lower your interest rate. My clients usually ask my advise when the situation arises. I usually reply with the disclaimer that I have no professional lending experience, however I am always willing to share my opinion. I have done my fair share of personal loans so I do believe this makes me somewhat knowledgeable.

My advise and opinion is NOT to pay points. Here is my logic and an example using very basic math and numbers. Remember, every situation is different and my example may not reflect current market conditions.

If you have a loan for $300,000 and an interest rate of 6% the principal and interest payment or (P&I) would be $1,798.65. Say for instance you are offered a choice of paying $3,000 to "buy down" or "pay points" for a interest rate of 5.75% your payment (P&I) would become $1,750.72. This sounds great, you will save almost $50.00 per month ($47.93).

Well consider the fact that if you put the $3,000 as part of your down payment, thereby reducing your loan amount to $297,000 with the original 6% interest rate your payment would become $1,780.67 (P&I). You would still be saving almost $20.00 per month and the $3,000 is essentially going back to YOU, not the lenders profit. This money has reduced your loan value and is contributing to your own equity.

The $3,000 buy down amount that you pay to the lender with a savings of $50 per month, will take 60 months of payments before recouping your $3,000. Having put the money down against your own loan, you are paying less and if you sell before 5 years (which most people will) you will not have lost that "point money" AND you will have LESS of a payoff amount, potentially giving you a higher net upon selling.

This is making YOUR money work for YOU and keeping it in your pocket.   

As I said above, I am not a professional lender, so it is possible I am missing a relevant point. If you have any suggestions, or perhaps any corrections to my math, calculations, or theory above, I would love to read your comment. Feel free to share your point of view, weather you agree or not.

If you are in need of a professional Lender here in the St George Utah area, Contact me and I can provide a list of local, reputable Lending specialists.

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