5

First time home buyer here.

So I've been reading about points and how an up-front payment can save you money in the long term. At first, the numbers seem pretty convincing. For example, pay $5000 upfront for a whopping saving of $20,000 over 30 years.

... But if you took that $5000 and invested it, wouldn't you get a lot more than that over 30 years, even at a modest return rate of 6-7%? Suddenly points seem worthless.

Is my math wrong? Is there some other advantage regarding points that I'm missing?

  • 1
    generally one of the most important pieces of information in a decision to pay points is how long you plan to own the property, something you've not told us. Saving xxx over the lifetime of the loan only applies if you don't cut the loan lifetime short by selling in a year or five – Chuck van der Linden Jul 14 '11 at 8:15
  • You make a good... puts on sunglasses... point. Yeeeeeeeah! But seriously, we will try to pay off the house early. Not sure how early, however. – anon Jul 14 '11 at 16:48
  • paying off early, or refinancing (see JohnFx's response) also cuts the life of the loan and reduces the value of paying points – Chuck van der Linden Jul 14 '11 at 18:12
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Let me give you the benefit of my experience. I paid a bunch of points (4) when I bought my first house for similar reasons than you mentioned including:

  • Lower interest rate would result in savings over life of 30yr loan
  • I had a big capital gain from cashing out stocks for the house down payment and the points (as interest) would offset the tax liability.

Why I wish I hadn't:
(1) Interest rates plummeted (not as likely to happen today) and I wound up refinancing the loan within the fist 10 years negating the savings that I would have had over the life of the loan. Also, it made me feel stupid for paying close to $5K to knock 1% or so off the loan rate only to have an even lower rate offered to me with no points within a decade.

(2) I didn't take into account that I'm the type of person who would try to pay the loan off early, and I did. Way Early. So even if I hadn't refinanced, the extra points were really a waste of money.

(3) In the US, at least, you can't always deduct ALL of the money you paid in points in the first year. You may have to spread that deduction over several years.

(4) You are right about the alternative being better (investing the points), since the benefit of paying them is at most 1-2% on your loan, you don't even need a 6-7% return to make it a better deal to invest them. HOWEVER, I get skeptical when people compare paying interest to returns on invested money like that. If you don't pay the points will you actually invest that money for the 30 years (or whatever the term of the loan is)? It's easy to say that when you are talking theoreticals, but $5k in your pocket is also pretty tempting when the deal is done.

Good luck with the new house!

3

Your math is not wrong. That's why banks want these points. They did the same math too.

There may be some immediate tax advantages for points though, in that case you can get return of your tax rate for the year of the points (which may make it worth it, if you don't want to keep the mortgage for more than, say, 10 years). Check here for details.

  • Thanks for the re-assurance and the link. It's pretty confusing, but I'll look it over =) – anon Jul 15 '11 at 1:40

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