Should You Pay Points When You Refinance Your Delaware Mortgage?
In a previous article, I described the current interest in refinancing, and how you need a Delaware real estate attorney to assist you. Let’s assume you’ve decided to refinance the mortgage on your home in Delaware. Your loan officer tells you his company is offering a mortgage with zero points. But you also learn that you can get a lower interest rate if you agree to pay points. The purpose of this article is to explain what points are, and to show you how to figure out whether paying points makes sense for you.
A point is a dollar amount you pay your mortgage company at the time of settlement. One point is a one percent of your mortgage amount. So if you borrow $200,000, one point equals $2,000. Paying points is, in effect, paying interest up front. The more up front interest you pay, the lower interest rate you can get.
But the question is whether it makes sense for you to pay points. The monthly payment (of principal and interest) on a 30-year $200,000 mortgage would be $1,167 if the interest rate is 5.75%. Let’s say you’re told that if you pay one point, you could lower the interest rate to 5.125%. Your monthly principal and interest would then be $1,089 instead of $1,167. That’s a savings of $78 a month. The cost of one point is $2,000, and if you divide $2,000 by $78 per month, you’ll see it takes 25.6 months (just over 2 years) before you break even.
Another factor to consider is whether you have to borrow the extra $2,000 in order to pay the points. In that case, you’d be borrowing $202,000, so you’d have $2,000 less equity in your home, and your monthly payments would be based on a $202,000 loan rather than a $200,000 loan. Your monthly payment on a $202,000 loan at 5.125% would be $1,100. Your monthly savings would be $67 ($1,167 - $1,100), and it would take 29.8 months before you break even.
There are some excellent online calculators available that help you decide whether it makes sense for you to refinance. These calculators also allow you to compare a mortgage with 1 or more points with a mortgage with no points, so you can see which is the better deal for you. Here are a few:
