We all love to save money, especially when we’re buying something as big as a home. That’s why discount points can be so attractive. For a one-time, upfront fee, discount points lower your monthly payment and reduce the overall cost of your loan.
But, discount points aren’t for everyone. Consider the following questions to decide if they are right for you.
What’s the term of your loan?
You purchase discount points by paying a percentage of your loan amount. Typically, one point costs 1%. For a $350,000 home, one point will generally cost $3,500.
The point reduces your interest rate and consequently the cost of your monthly mortgage payment. Though this monthly savings can vary, for a $350,000 loan, one point will typically save you about $20 a month. This means it will take 175 months to begin seeing a positive return on your investment (ROI).
How long do you play to stay in your home?
If it takes you 175 months to begin seeing a positive ROI, that’s roughly half the lifespan of your mortgage. Most first-time homebuyers move within five to seven years. Consider carefully how long you reasonably expect to stay in your home before you buy points.
Do you expect to refinance?
Whether you plan to move or not, do you think you might refinance? If you do so before you break even, you’ll lose money. If you buy discount points, it’s best to stick with your original mortgage for several years before making any changes.
Can you afford discount points?
With the down payment and closing costs, buying a home requires a substantial amount of cash. How much surplus cash do you have on hand? It’s a good idea to make sure you have some extra money set aside in a rainy day fund for unexpected expenses. Will the cost of your points allow you to do so?
Need help crunching the numbers? Contact my team today, we’d ready to help.