A loan officer or broker may try to convince you to pay points on your mortgage loan. It's not unreasonable to wonder whether the loan officer has your best interest in mind, or just his own interest in making money on the loan. The answer depends on your specific situation, namely you and your partner's plans for the future.
A point is an added fee you pay to a lender or broker when you close a mortgage loan. You pay this fee at the closing table. One point represents one percentage of your principal balance (the amount you're borrowing to pay for the house). For example, if you plan to borrow $150,000 to buy a home and plan to pay two points on the loan, you would have to come up with $3,000.
You may be thinking to yourself, "why in the world would I want to volunteer more money to a lender than I've already committed to pay?" Well, the lure of paying a point is that in exchange for that added fee, the lender can usually offer you a better loan package. Each point you pay reduces the interest rate for the loan. Over time, even a quarter point difference in your rate can save you thousands in interest. The rationale of paying the point is that you'll save much more in interest than what you pay upfront to the lender. A lower interest rate also affords you a lower monthly payment.
Do You Have It?
One of the first questions you should ask yourself when determining if it's a good idea to buy points is "can I afford to?" You have to pay points at closing along with your other closing costs. Depending on the number of points you plan to pay, it could become very expensive. As a new homeowner just starting your life together with your partner in the same home, you may want to keep that extra cash in your pocket to pay for other needs, like furniture and improvements for your new home.
Your final decision on whether to buy points on your mortgage loan depends largely on how long you plan to stay in the house and keep that mortgage loan. If you only plan to stay in the house for a couple of years and then move on, then you may not experience any interest savings from paying a percentage point upfront. Bankrate has a "Should You Pay Points or Take a Higher Interest Rate" calculator that can help you and your partner determine if paying a point now will benefit you in the future.
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