Points on a Loan? Yay or Nay

8 Replies

Hi Everyone, Newbie here...

I've always been told "Never pay points on your loan!"

But is there ever a time where it would make sense to pay a point or 2 on a loan as an investor? Is this the market to possibly be paying a point to get a lower rate on investments since rates are going up? Not thinking flips just Buy and Hold.

Thank you for the kind words of wisdom :-)

I am usually opposed to it. There is really so much that can change. You could sell or refinance and it could make it a lot harder of a choice if you paid a couple grand in buying down a loan. I would keep that cash for reserves. I have a House right now that I am refinancing for the 3rd time. I plan 100% to own it for a long long time. There have just been times for me to reposition and take money out.

I always like having options. Paying points usually makes it harder to change those options.

@Allyson Edwards The best way to solve this is to get out a spreadsheet and run some calculations. If you have to pay 1-2 points but can get a .25% lower interest rate, it could very possibly make sense in the long run.

Alternatively, if you're thinking of a non-conventional lending option like a Hard Money loan, you will almost always have to pay points. But if it is your only option to capital, it might be worth it.

Bottom line I'd say is that there is no right/wrong answer - it's all about how the numbers come out and if you can get an ROI acceptable for your standards.

Depends on how long you keep the loan.  There's a break even point which can be calculated.  As I recall it's somewhere around 7 years.  Beyond that point you start saving money.

Originally posted by @Allyson Edwards :

Hi Everyone, Newbie here...

I've always been told "Never pay points on your loan!"

But is there ever a time where it would make sense to pay a point or 2 on a loan as an investor? Is this the market to possibly be paying a point to get a lower rate on investments since rates are going up? Not thinking flips just Buy and Hold.

Thank you for the kind words of wisdom :-)

 "Always" and "never" are both dangerous words in real estate. 

Decide after you have the property under contract how long you anticipate you will own it. If the break-even is 3 years and you're going to own it for 10+ years, it can definitely make sense. 

It's very property specific. Let's say $4000 in points will save you $100/mo. Other than the mortgage, is there something you could upgrade about the property for $4k that'll yield $100/mo in cashflow? Property specific question. 

Originally posted by Account Closed:

Depends on how long you keep the loan.  There's a break even point which can be calculated.  As I recall it's somewhere around 7 years.  Beyond that point you start saving money.

 5 to 9 years is typical. There's diminishing returns at some point. The break even for the first couple increments might be 6 years, then it starts to shift to 8 or 9 years, at which point one should be more skeptical. The very first increment is often like 2 years and almost always makes sense. 

IMO -  if  you can  1) recover the amount of the loan fee ( points )  via the  monthly  savings  before you sell / payoff  or refinance the loan AND   2) you can part with the  extra funds ..then its worth considering

Originally posted by @Dave Skow :

IMO -  if  you can  1) recover the amount of the loan fee ( points )  via the  monthly  savings  before you sell / payoff  or refinance the loan AND   2) you can part with the  extra funds ..then its worth considering

 AND the rate of return on your investment is higher than any other investment option you could place it in without increasing risk.

Originally posted by @Allyson Edwards :

Hi Everyone, Newbie here...

I've always been told "Never pay points on your loan!"

But is there ever a time where it would make sense to pay a point or 2 on a loan as an investor? Is this the market to possibly be paying a point to get a lower rate on investments since rates are going up? Not thinking flips just Buy and Hold.

Thank you for the kind words of wisdom :-)

Good point on rising rate environment influencing how low to go on the rate.  In truth, there are some really good reasons to pay points and they all come from math.

How long do you intend to keep the property is the first question I ask?

What's the difference in p and i between not paying any points, paying a point or two and not paying any closing costs (jacking up the rate)?

It's better to have all the information and make an informed decision rather than just doing what your grandfather (maybe not your literal grandfather, but you know what I mean) told you to do.

Do the math and never say never.

Stephanie