No Points Mortgage Refinance

In this article we’ll look at the pros and cons of a no points mortgage refinance. First question, before we begin. What’s the point of points?

Well, before that, I suppose, is the basic question: what is a point? Quite simple, 1 point equals 1 percentage point of the principal of your home loan. If the value of your loan is $200,000, 1 point would be $2,000. Simple, yes?

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OK. Now, most mortgage lenders will offer you the option of paying points as part of your closing fees in return for a reduced interest rate. When you refinance your mortgage you’ll probably be offered this option.

The question remains: what’s the point? Well, it really depends on your long-term plans. If you plan to stay in your home for a number of years it may be worthwhile to pay a point or two up front to get that reduced interest rate. Take a look at this example:

You’re refinancing a $200,000 mortgage over a 30-year term at 6.5%. If you pay a single point ($2,000) the lender may knock your interest rate down by .25%. That means that you’ll make a monthly saving of $33 with your monthly payment dropping from $1,264 to $1,231.

Now, let’s do the math. With a monthly saving of $33 it’ll take you 61 months to recoup the $2,000 you spent on the point. So, if you intend to stay in your home more than around 5 years, you might as well pay the point. If you stay for the full 30-year term you’ll save $11,880, that’s not exactly pocket change.

But! And this is a big but, if you’re not absolutely sure that you’ll stay in the property for at least five years you might as well put your wallet away, buddy. Paying points up front when there’ll be little payoff in the future is worse than flushing your cash down the toilet. Instead, take the no points mortgage refinance option and spend the money on home improvements instead. At least that should increase the value of the property and bring some tangible benefits.