This is a question asked by every borrower these days. A point is one percent of the loan value. If you are paying two points on a $100,000 loan it, would be $2,000. Because no one wants to pay anything unnecessary, the prospect of paying a couple of thousand dollars never appeals to anyone. Consequently, a lender's offer of a zero point loan sounds enticing. Borrowing and lending is what is called a zero sum game, like poker. You are either going to pay upfront or later and it is your choice. There are times when paying points is a good idea and times when it is not a good idea. The best way to decide whether you should pay points or not is to perform a break-even analysis. The calculator on this page will perform this analysis for you. Compare the number of months you plan on keeping the house to the break even calculation, this will be major factor in deciding whether to pay points.
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. 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.
Remember that this calculation is provided to help you make an intelligent decision but before making such an important step you should seek professional help.
Michael & Cindy Morris
Coldwell Banker Residential Real Estate LLC.
Cindy: (727) 480-8427
Michael: (727) 251-7447
FAX (727) 397-5978
