1st Home - should I purchase points for my loan?

[Lisa Marie]

Hi all,

I'm in the process of buying my first home with the intent of turning it into rental property after a few updates. The entire process has been a new experience and now I'm deciding which lender to choose from.

I'm wondering if there are any benefits to purchasing points for a lower rate? I've been reading articles about points with the bottom line that if you plan on living in the house for more than 5 1/2 years then it is a good idea. I don't plan on living in the house, but I do intend to keep it for a long time if all goes well. 

Thank you!

Lisa

[Chris Mason]

Hi Lisa,

Do the math. :)

Once you're in contract and able to actually lock a rate based on that day's pricing:

* Figure out the cost of the amount of discount points you are considering, in dollars. Call this X.

* Figure out the P&I payment difference between the 'no points' rate and what you are considering, in dollars monthly. Call this Y.

X / Y = break even point, in months.

If you intend to own the home for longer than that period of time, do it. If not, don't.

Paying $5k extra now to save $40/month only makes sense if you intend to own the place for 125 months, which is about 10.4 years.

So for flippers, they should actually jack that rate up as high as possible and do the same math in inverse. $5k saved now for $40 extra out of pocket each month moving forward is a great deal if the "each month" is only going to last 8 months. The lender was offering that $5k to you with a break even point FOR THE LENDER of 125 months, and you will only be in the property for eight months! Evil genius score here is... probably about 7/10. Not great, but also certainly not bad either.