The emotional reaction for most people seeking a mortgage is to get the lowest interest rate possible. However, that may not be in their best financial interest. Why you might ask?
Points, which are technically called “Discount Points”, buy the interest rate down to a lower rate than what is being offered at “par”, which is the rate that comes with no cost to it. Points can be tax deductible on a purchase mortgage in the year they were paid and over the life of the loan on a refinance so you will hear many a Lender reassuring you that paying points is beneficial. But is it?
It’s easy to figure out! Do the math! Calculate the difference between the monthly payment for each of the interest rate offerings using the Par price as your common denominator and then divide the upfront cost of the points by that savings to come up with the number of months it will take to breakeven on that cost. If your plans aren’t to retain the property long enough to exceed that time frame, it doesn’t make sense!
On a purchase, it sometimes makes more sense to apply that lump sum towards your down payment. On a refinance, most consumers roll the costs into the loan which uses up your equity so although you may have no out of pocket expense, your using up equity to buy the lower rate so you really better make sure you’ll outrun the cost.
Questions? A conversation with your CPA might help or give me a call at 360-459-1200 if you need help with the math!