Abdullah Yavas, professor of business administration at Penn State’s Smeal College of Business, and Yan Chang, senior economist at Freddie Mac recently concluded a research study which revealed that paying points on a mortgage rarely pays off.
I paid points to bring down my interest rate when I bought my first condo in the late 80′s. I sold it 3 years later, long before I would have saved enough in interest to offset what I paid in points. This study found “only 1.4 percent of borrowers held their loans long enough to make their decision to buy points pay off.”
For more details, read the release by the Smeal College of Business.
ABOUT THE AUTHOR
Fran Bailey shows, previews and tracks downtown Chicago homes for sale giving her the insights needed to help her clients negotiate the best price and terms. Fran has been quoted in numerous Chicago and national publications. To schedule showings of listings regardless of broker or to contact Fran email her at fran.bailey@bairdwarner.com or call 773.793.4516. Learn More
Fran Bailey, Realtor
{ 2 comments… read them below or add one }
Fran,
Good article. This is truly a math issue, not an emotional issue. I ask buyers how long they intend to stay in a property, am aware of overall trends regardless of their answer and simply take the amount they would pay in points to “buy down the rate” and then determine how many months they’d need to be in a property to break even on the difference between the monthly payment on the ‘bought down’ rate and the going rate. In most cases it does NOT pay off. But there are exceptions and they can be dramatic. and the difference in rate over the course of the lifetime of the loan can add up to tens of thousands of dollars – but it’s all dependent on how long they stay put. I agree with the authors – for most folks it’s not a good idea. Listening to the buyers – what they’re really saying – is the key!
Fran,
Being in the banking industy for the last 8 years I can tell you first hand that for most people (as quoted in your post (that 1.4%))are paying “way-too-much” in points overall as an average (the study failed to included sub-prime lenders nor did they disclose who exactly their sample audience was.) If you have an “upfront banker” on your side that is compitent at explaining “why” a borrower should “buy down” the rate then its a 360 degree win overall [the realtor, the banker & the client.] I can point to numerous instances where paying a point justified the purchase. I can also point to numerous instances where paying points was a direct insult to the borrower. Its imperative that it “makes financial sense” and “recapture costs” are just that, recaptured. A blanket statement saying that you should NOT pay points or that it “rarely pays off” is just not realistic and elevates a clients “lending paranoia” not good for business.