Should You Pay Discount Points?

Should You Pay Discount Points?
By Don Anderson

Every one loves a lower interest rate but should you pay the points a lender charges for the reduced rate? The likely answer is... not in every case. The answer is really a function of how long you'll remain in the property. A point is one percent of the loan amount and points can also come in a variety of fractions, ie. 1.5 or 2.25. In any event, just take the number as a percentage of the loan amount to determine the dollar value of the discount. A $200,000 loan with 1 discount point equals $2,000 that significantly increases closing cost. That's the first of three pieces to the puzzle. Next, calculate the principle and interest payment using the market rate, which is the rate if no points are paid. Then... calculate the payment again using the discounted rate, the rate associated with the payment of points.

The difference is your monthly savings by paying the point or points in some cases. Now, divide the value of the points by the value of the monthly savings to determine the number of months till you're even. Let's say that the answer is 60 months. Well, if you're in your dream home and no future move is planned, you may very well want to consider paying the points. On the other hand, if your job may take you elsewhere within 60 months, tell the lender thanks but....no thanks! Of course, if we find you a motivated seller then you might have your cake and eat it too! It's always nice to have a lower payment at someone else expense.

Don Anderson is a real estate broker in Knoxville, Tennessee and he can be reached 865-588-3232. http://www.knoxvillehouses.com

View Don's video "Finding The Equity Treasure" at http://www.knoxvillehouses.com/index.cfm/Equity-Treasure-4539.html

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