This is the ninth installment in an ongoing series on mortgage basics. On my mortgage website, I cover a host of topics on my frequently asked questions page. Since this is the most popular page on my site, I thought it might be a nice way to begin my blog. You can find the entire list of FAQs here: Arizona Mortgage Pro FAQs. I will continue this series covering one topic per post.

What are "points" and should I pay them on my new mortgage?

A point is equal to 1% of your loan amount and is paid upfront at the time of closing (in a refinance, the points may or may not be rolled into the loan amount). For example, one point on a loan of $150,000 would equal $1,500, two points would be $3,000, etc. Points are generally paid for one reason, to get a lower interest rate.

The question of whether you should pay points or not depends on your unique situation. In order to determine whether this is the best plan of action, a break-even analysis is necessary. To do a break-even analysis, you must first determine how much the point(s) are costing you upfront. Let's use an example of 2 points on $150,000, or $3,000 in total points. Next, determine your monthly savings from paying points versus not paying points. For the same example, we'll say that the $3,000 you are paying in points is saving you $75 per month. To calculate your break-even point, you would divide the amount you are paying upfront ($3,000) by the monthly savings ($75) you are receiving as a result of that upfront payment. That number will equal the amount of months it will take you to break even by paying points. In this example the break-even date would be 40 months or 3 years and 4 months. If this person were planning on being in their house for longer than 40 months, paying points makes sense, any less, it would not make sense.

If this seems like too much information, you can use a general rule of thumb. If you are planning on being in the house for less than 5 years or are unsure how long you will be there, your best bet is not to pay points. If you plan on being in your house for more than 5 years, you will probably benefit from paying points. Admittedly, this is a bit of an oversimplification, but it is a good starting point. There are other issues such as tax implications which make an exact break-even analysis difficult. If you have questions regarding paying points and how it affects your taxes, it is best to consult a tax professional.

Thanks for reading my blog!

John Moran

Senior Loan Officer

3920 S Rural Rd #110 Tempe, AZ 85282

Direct: 480-300-4520

Fax: 602-904-7741

Website: www.azmortgagepro.com

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