Hsieh

Believe it or not, sometimes paying points to lower your interest rate can be a good thing. We've been conditioned to believe that paying points to lower an interest rate is a scam, a way for sly mortgage brokers to take advantage of uninformed borrowers.

Not so all the time.

Paying a few points can save you money on your mortgage if you plan on living in the home long enough to re-coup the expense of the up-front points.

Say, you need to borrow $280,000 because you and your spouse gotta have this house, no doubt about it.

You also need the interest rate to be at 5.25% to fit your monthly budget. After the lengthy application /qualification process with your bank they decide despite your disappointment, to approve your loan at a higher 6% for a 30 year fixed rate.

So, your total monthly payment will be $1,678.00 for 30 years with the 6% loan.

That's stretching your budget, you may not be able to afford that monthly note.

Instead of making your wife or husband get an extra job dressing up like a taco or delivering papers before the rooster crows, you may opt for the lesser humiliating option of purchasing points from your broker thus lowering your interest rate/monthly payment.

Paying for 3 points will lower your interest rate to 5.25% and brings the monthly payment down to $1546.00.

That's because each point purchased lowers your interest rate by .25%.

Also each point will cost 1% of the amount borrowed. That would be $8,400 in this case, which is paid upfront or rolled into the cost of the funds borrowed.

"That seems like a lot of money" you're probably saying. It's all relative, here are the facts...

If you pay NO points the total cost of the interest paid on this loan will be $324,080.

If you pay 3 points the total cost of the interest paid on this loan will be 276,560.

So, as you can see, you spend $8400 upfront to save $47,520, if you choose the pay points option. However, no savings will take place unless you live in the home long enough to realize the savings!

You will be saving $132.00 per month so it will take about 5 years or 63.6 months (63.6*$132=$8395) to recoup the cost of the points paid upfront.

So, paying points to lower your interest rate can actually save you money in the long run. However the decision to purchase points to lower your interest rate should be strictly based on how long you plan on staying in the home and how much cash you have at closing.

For 15 years Leslie Collins has been helping all types of borrowers get the loan information they need to make the best home buying decision . Please visit the easy to use mortgage calculator before you talk to banks or loan officers. Also see our easy online mortgage application safe, secure and takes about 2 minutes!