With interest rates near all-time lows, there have been a record number of applications for refinances. If you’ve found yourself looking into a refinance, you were likely give the option to “purchase points.” Purchasing points involves paying more to refinance in order to get an even lower interest rate. Typically buying 1 point costs you 1% of the loan value and will save you .25% off your interest rate.
For example a $300,000 mortgage at 4% would cost you $3,000 at closing to lower the rate to 3.75%, saving you approximately $750 in interest in the first year. It would take about 6 years to breakeven.
I’ll say that in general I am not a big fan of purchasing points. Most banks understand that on average selling points, can increase revenue since people will eventually refinance again or sell their home before they originally anticipated. We often look at the savings of purchasing points over the course of a 30 year mortgage while the reality is that very few actually keep it for 30 years.
However, there are instances where purchasing points can make sense. For example, if you are confident that you have found a long term home of 10+ years you will likely come out ahead purchasing points over. People where this may apply include -
- Retirees who have found their retirement home and have children who are settled.
- Working individuals and families with a linear career path like the government.
- Investment properties that you can afford and plan to own for a long time.
Disclaimer: Alex Voorhees and Reston Wealth Management do not provide mortgage, legal, accounting, or tax advice. This information is not intended to be a substitute for specific individualized mortgage, legal, accounting, or tax advice. We suggest that you discuss your specific situation with a qualified mortgage, tax or legal advisor and/or licensed realtor. The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) or strategies may be appropriate for you, consult your financial advisor prior to implementing a strategy. No strategy assures success or protects against loss. You should consider the investment objectives, risks, charges and expenses of any investment carefully before investing.