To pay or not to pay

I have always wondered why people have the fear of paying points on a loan. Now sometimes it makes sense and sometimes it doesn't One fear is perhaps not fully understanding what it means to pay discount and origination fees in order to get a lower rate. Though not for everyone it always make sense to look at various options. One question I always ask my clients is "how long do you plan to stay in the home?" While no one knows for sure what the future hold most people have a fairly accurate idea. I have a client who plans on refinancing and paying $8,000 in discount points and a $2700 origination fee. To make this clear any discount points are paid to the lender and not the broker, loan officer or anyone but the lender. It is NOT profit for us. Origination fees are profit. His rate though will be 4.0% on a 30 year fixed. He is saving $321 per month over his current rate. He will save $3852 per year. It will take him 34 months to break even on his discount and origination fees. There are other charges for the loan so his true break even point is longer. He plans on staying there 20 years according to he and his wife. Now over that 20 years he will save $77,040 over the 20 years. Doesn't seem like such a bad investment now does it? If they stay 30 years they will save $115,560 in lower monthly payments. They can also deduct the points and fees over the life of the loan which could provide some tax savings as well. Please consult a CPA to assess how that would impact you. I am far from a CPA. Generally for this plan to make sense you must plan on living in the home for a number of years and have the equity to roll in the larger number of points that are required. Unfortunately most banks don't allow such a massive buydown on the rates. I have the lender that allows this though and we are moving forward. If you would like to see if this scenario make sense for you just email me and we can review the numbers together. brent@choicefinance.net