I Get The Points!

Bill has some questions for Dave about a refinance of his home and factoring points into that.

QUESTION: Bill wants to refinance from a 30-year loan to 20 years. He knows that Dave doesn’t like points. They don’t plan on moving from their home and when he runs the numbers, he pays less money when there are more points. If they are going to stay in the house for several years, would points be worth it? Dave explains why he doesn’t think so.

ANSWER: When you pay points, you’re prepaying the interest. The question to ask is what your break-even point is. I think you’ll pay off the house before then. As you make more, and your kids leave home, you’re going to pay more on this house and it will pay off earlier. The average mortgage in America, taking into account refinancing, paying off or selling, is 5.6 years. If you figure in cost of capital to recoup points is 7 years, so it doesn’t make sense. Staying in the house doesn’t alleviate the argument.

If I woke up in your shoes, I would take a par quote with no points and no origination. Your payments may be a little higher, but it doesn’t cost you a bunch on the front end.