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Sunday, November 23, 2008



Points are dollars you pay as a percentage of your loan. A common use for points is to secure a lower interest rate on your loan. By paying a little bit up front, points allow you to pay less each month. A point is one percent of the mortgage loan amount. To use easy numbers, let's assume that your loan will be for $100,000. In that case, one point would be $1,000 (100,000 x .01 = 1,000). While shopping loan rates, you may find that different loans are available with and without points. You might pay anywhere from zero to three points. In our example, that means you'd pay anywhere from $0 to $3,000 up front. The best way to decide whether you should pay points or not is to perform a break-even analysis. This is done as follows:
  1. Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.
  2. Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month.
  3. Divide the cost of the points by the monthly savings to come up with the number of months to break even. In the above example, this number is 40 months. If you plan to keep the house for longer than the break-even number of months, then it makes sense to pay points; otherwise it does not.
  4. The above calculation does not take into account the tax advantages of points. When you are buying a house the points you pay are tax-deductible, so you realize some savings immediately. On the other hand, when you get a lower payment, your tax deduction reduces! This makes it a little difficult to calculate the break-even time taking taxes into account. In the case of a purchase, taxes definitely reduce the break-even time. However, in the case of a refinance, the points are NOT tax-deductible, but have to be amortized over the life of the loan. This results in few tax benefits or none at all, so there is little or no effect on the time to break even.
If none of the above makes sense, use this simple rule of thumb: If you plan to stay in the house for less than 3 years, do not pay points. If you plan to stay in the house for more than 5 years, pay 1 to 2 points. If you plan to stay in the house for between 3 and 5 years, it does not make a significant difference whether you pay points or not!In addition, points are normally tax deductible whether you or the seller actually pay for them.


Points on a refinance are not deductible in the same way. On a refinance you normally have to spread your deduction out over the amortization of your loan (check with your tax advisor). If you are tight on funds for closing opting for a loan with the lowest upfront cost and no discount points may cost may be right for you. Over the life of the loan you may be paying out more money however enabling you to provide for your families immediate needs.




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Current Mortgage Rates*

Loan Type
National Average
30-yr. fixed6.00%
30-yr. fixed jumbo7.75%
15-yr. fixed5.75%
15-yr. fixed jumbo7.50%
7/1 ARM6.12%
5/1 ARM5.75%
3/1 ARM5.88%
1-yr. ARM6.62%
1-yr. LIBOR ARM6.00%
10/1 ARM7.75%
40-yr. fixed7.38%
*Mortgage Rates Updated: 11/21/2008