Many borrowers ask us whether they should pay points to get a lower interest rate. Here’s the best way to decide.
Points are up-front interest that a lender charges to get a lower interest rate. If you are thinking of paying points to get a lower rate, find out how much the points are going to cost, and then divide that amount by the savings you will realize by getting the lower rate. This will tell you how long it will take to get your money back. As an example, if a lower rate costs you $2,000, and the savings will be $20 per month, it will take you 100 months to break even. That’s a little more than 8 years. Does that make sense to you? If so, pay the points to get the lower rate. If you think that’s too long to get your money back, don’t pay the points and go with the higher interest rate.
When rates are as low as they are now, it usually does not make sense to pay to get an even lower rate, but it’s always worth asking about.