I find it interesting that so many people are so against paying for points when they refinance. Maybe it is because they feel like they are being ripped off if they are being charged points. In same cases this could be true, but in other cases paying a point or part of a point is a great way to leverage equity in your home to lower your monthly mortgage payment. This is especially true for people on fixed income who need a lower monthly payment to help their retirement money go further.
What is a point? A point is simply 1% of your loan amount, so basically you are paying more upfront for a lower payment and interest rate over the course of your loan. When you are doing a refinance, the fees get added to your loan amount and so you don’t pay anything extra out of pocket. If you plan on keeping your home and your loan for a long time it is okay to increase your loan amount to lower your monthly payment. You will NOT want to pay points if you plan on selling your house or refinancing soon because you would not benefit from the monthly savings enough and you would end up owing more on your home.
I don’t recommend paying points when you are buying a home.
On a purchase you would be using your hard-earned cash to pay for the lower interest rate which just doesn’t make sense most of the time. It is different on a refinance when it is the equity in your home that you are leveraging to lower your payment.
Paying points buys down the interest rate. For example, if you got a 0 points loan for $400K at 2.875% your payment would be $1659.57 if you paid 1 point and added it to your loan amount your loan would be $404,000 and your interest rate would be 2.5%, your payment would be $1596.29. You would save $62 per month over 30 years or $22,576. Most people don’t keep their loans for 30 years, but you can see that over time you are saving more money than what it cost you to get the lower interest rate.