Points: To Pay or Not to Pay, That is the Question?
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When purchasing your mortgage, the idea of paying points to lower the interest rate seems like a very smart thing to do. You save money on the long term loan you are taking out as you are paying less in interest.
When the question of how long you plan on staying in the home is asked by a mortgage broker, chew on it a bit. Even if you are planning on staying in the home for the next 10 years, will interest rates drop enough for you to refinance. If they do, that same mortgage broker will be at your door telling you that the time to refinance is now, even after you had paid points to lower the initial interest rate.
And that is not to knock the mortgage broker, they have a job to do and if you gave them input that you were staying for a long time, their advice was proper. But as you will see in this study from Penn State, odds are that paying points will not help you at all in the long term.
To see how points have worked out for borrowers, Penn State professor Abdullah Yavas and one of his graduate students, Yan Chang, who is now a senior economist at mortgage giant Freddie Mac, tracked 3,785 fixed-rate mortgages between 1996 and 2003. The two researchers obtained their data from Freddie, but the company didn’t fund the research or assist in any other way, says Mr. Yavas.
The pair found that just 1.4% of borrowers held their mortgages long enough to break even on the points they paid. The rest paid off their loans more than three years, on average, before they would have hit that break-even point.
How could so many people get it wrong? Interest rates fell during the period, and home values rose, so those who refinanced had good reason to seek a new deal. via the RealEstateJournal
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Comment by gudipudi on 2 January 2007:
:Mortgage refinancing equates variouslenders to get lowest refinance rate available. And refinance calculators figures whether it’s worth chasing a lower interest rate.
cheers
gudipudi
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http://www.mortgagerefinancing.com/
Comment by Frank on 4 January 2007:
Thanks for your posting!
I was looking for data such as your 1.4% number.
I do realize that equations for paying points will change dramatically depending on where rates are heading (if they are going down, people will refi and not get any use of points, if they are heading up, they might fine them useful).
All in all I tend to tell my clients to stay clear of points. Or if the break even analysis says it pays for itself in 3 years, ONLY do it if you are planning on staying 6 years. IE, to buy that type of insurance (a pay down), you better expect at least a 2x return. There are too many other variables to just try to break even.
Thanks!
Frank- Broker/Realtor/Owner Washington DC area
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Comment by Frank on 4 January 2007:
Forgot to add my blog: http://blog.Franklyrealty.com