patrick.net

From a strict #'s standpoint, paying points have a pretty good return on investment. For example, paying $5,000 in points can be returned in less than 3 years.

But that is in an environonment where your loan will continue. A few things can ruin those assumptions: 1) rates go even lower so and 2) having to sell.

Risk #1 depends on where you think 30 year mortgages will go in the short/medium term. Risk #2 is something you have an idea and control.

Points doesn't mean going all in or out. There is usually a sweepspot for your buck. For example, one point can trim 375 basis point, but two points may give you only 500 basis point. Also, because there is a larger up front cost to points, there is more potential to eliminate lenders fee, which means your net points cost is really less than stated amount.

Well if the person had paid points, then the principal would likely have been reduced....

My sinical thinking makes me not want points. To my understanding, the loan officer gets more commission if points were purchased. My thought was, why would he get more money, if it was better for me?

@SF Ace,
Also, because there is a larger up front cost to points, there is more potential to eliminate lenders fee.

This is interesting. So just because I purchase points, they may actually reduce some other fees for me? My loan is going to be for $230k. I do not know when I'll be paying it all off, but it sure as hell will not be 30 years. Maybe 10 years or so.

pkennedy says

Well if the person had paid points, then the principal would likely have been reduced….

@Pkennedy - Since my loan would be for $230k, 1 point would be like $2300. This math is too complex for me to think through at the moment. Why do I not just add $2300 to my downpayment, making the loan $227700?

vain, points like 15 year mortagages reduces the banks risk simply because the payments are lowered and you have more "skin" in the mortgage. Your skeptisim is not warranted. In this case, it is a win-win, not win-lose.

Bank policy are pretty strict about reducing points but there is more flexibility to lenders fee. It is a way of giving you a point discount without giving you a discount directly.

If you are planning to accelerate the payments that much, then points will return less, then you should not consider points. You should go with a 15 years mortgage instead. A 15 year mortgage gives you 625 basis point just for commiting to accelerated payments, that will give you even more bang for the buck.

Sadly, I will not qualify for a 15 year loan. This property will be renovated with an in-law giving me an extra $1000/month at least. I will not be able to construct that in-law unit in time to support a 15 year loan, and support my other obligations.

Maybe I shall purchase no points on a 30 year loan, and after the in-law unit is constructed, I will have some flexibility, and can consider switching to a 15 year loan if the interest rates are still low. It'll take about a year for me to make the place nice again, and construct an in-law unit during free time. My father is a contractor so we will be doing the work ourselves.

just keep your options open and see what 1/2 point, 1 point cost and evaluate then, I kind of gave you the basics. In your case, since you are doing renovation afterwards, you may modify the loan anyway so you may not see the value in buying down.

If your in-law suite is going to bring in $1000/month at least, and you're going to take 1 year to build it, you're losing $15,000 by taking your time. Why not save up a bit more so you can cover a few months at a higher rate and build it much quicker? Redoing your loan, you lose the non-recourse, and you'll end up repaying closing costs a second time.

I actually do have enough to cover the 15 year mortgage for a while but 1 year is just an estimate. I hate living at the edge. What if the in-law takes more than 1 year? I guess I have to spend a bit of money to retain flexibility. The non-recourse is not much of a burden to me. I would actually get more than twice the amount of PITI on this $230k loan shall I decide to rent out both top and bottom; so hopefully, defaulting will not be a possibility.