Frequently Asked Questions
Q: Should I pay points? Does a 0 point 0 fee loan really exist?
The best way to decide whether you should pay points is to perform a break-even analysis. This is done as follows:
- Calculate the cost of the points. Example: 2 points on a $100,000 loan is $2,000.
- Calculate the monthly savings on the loan as a result of obtaining a lower interest rate. Example: $50 per month
- 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 could make sense to pay points.
- 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.
- You may also want to consider the time value of money and what you could do with the cash by keeping it vice paying the points as well as how the reduced monthly payment differential could be invested in other places to earn greater returns.
At Global Lending Group our Mortgage Consultants are trained to assist you in analyzing the most advatageous methods of using a Mortgage as a financial planning tool.
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