{"id":120184,"date":"2019-12-12T12:00:57","date_gmt":"2019-12-12T19:00:57","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=120184"},"modified":"2024-02-19T08:09:59","modified_gmt":"2024-02-19T15:09:59","slug":"paying-mortgage-points","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/paying-mortgage-points","title":{"rendered":"Investors, Should You Be Paying Mortgage Points?"},"content":{"rendered":"

Mortgage points, known as discount points or \u201cbuying down the rate,\u201d are fees paid at closing to a lender to reduce the interest rate and lower your monthly mortgage payment. Generally, one point costs 1 percent of your mortgage amount. The more points you buy, the lower the rate on your loan and the lower your payment.\u00a0<\/span><\/p>\n

And what investor<\/a> doesn\u2019t like having lower expenses and more cash in their pocket?\u00a0<\/span><\/p>\n

Know When to Pay Points<\/span><\/h2>\n

In theory, the longer you plan to own the property, paying more points up front helps you save on interest over the life of the loan. <\/span>Conversely, paying upfront points is expensive and slows your velocity of money.\u00a0\u00a0<\/span><\/p>\n

Let me explain.<\/span><\/p>\n

Let\u2019s say you purchase a $125,000 property, with 20 percent down, on a fixed rate 30-year mortgage. Here is how your costs, savings, and opportunity costs would look for buying down one and two points.<\/span><\/p>\n

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In both rate buydown scenarios, the savings at the 10-year and 30-year mark is nothing to sneeze at. If the property was your primary home, you would consider the savings involved especially if the loan amount was larger.\u00a0\u00a0<\/span><\/p>\n

However, this home is not our primary, rather an investment property and the debt is outsourced to the tenant. So, let\u2019s look at the opportunity cost of paying this upfront fee.<\/span><\/p>\n

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Related<\/strong><\/em>: How to Land the Best Possible Mortgage Rates<\/a><\/em><\/span><\/p>\n

As long as the property cash flows well (if it doesn\u2019t, let\u2019s have a convo on why you are buying it!), you would actually make a better return investing the money you would use to buy down the rate. In this case, investing the fee to buy down the rate at 8 percent compounded annually would yield multiples over your savings (and you could certainly do better than an 8 percent return).\u00a0<\/span><\/p>\n

Decide What’s Right for You<\/span><\/h2>\n

\"calculate-financials\"<\/p>\n

To reach a decision about paying points to lower your mortgage rate on your investment property, do the following.<\/span><\/p>\n

    \n
  1. Calculate the cost of buying down the rate<\/span><\/li>\n
  2. Calculate the principal and interest payment for the respective APRs<\/span><\/li>\n
  3. Do the math (see above) to calculate how many months it takes you to break even\u00a0<\/span>\n