When Should I Pay Points?

"When should I pay points” is one of those questions it is a great deal easier to answer with a calculator and the full details of the exact situation that you have. The short answer is that you should pay points when they will save you money.

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When a mortgage is being arranged there are various fees and costs that need to be paid. These are usually expressed as “points”, or a percentage of the total value of the loan. One point is 1%. Now by asking when should I pay points we are actually being a little odd, for those fees are going to be paid somehow. The question really is not when but how, therefore.

A mortgage loan can be offered with points, no points, or with negative points. Negative points are like a rebate from the lender but it’s important to remember that the interest rate will be higher. It can be very useful to have this rebate for people who don’t have the cash to pay the closing costs. But in there is the important thing about points. If you don’t pay points then you will pay a higher interest rate.

So trying to work out “when I should pay points” is really asking which will be cheaper for me? To pay the costs now, in cash, or to pay a higher interest rate on the whole mortgage? The answer to that depends upon how much cash you have available, of course, but the other number depends upon how long you expect to keep the loan. If you intend to keep the mortgage for 30 years, then better to pay the points and get the lower interest rate for all those years. If you expect to only keep the loan for a few years, then better not to pay the points. At places in between, it depends, so get the calculator out.