Curious about thoughts on on discount points (I think I’ve already read every article on Google). I am refinancing my personal residence (future rental) as well as a rental property. The mortgage brokers discourage me from spending a ton on points (rolled in, not up front). In some cases, it’s a 16 year break even. I get that’s a very long time to break even, but I have no intention of getting rid of the properties and doubt rates will drop much below current. Max breakeven point for you?
The way points work is that they essentially use the time value of money so you pay more upfront to pay less in monthly payments. At the end of the day - assuming you hold your loan to maturity (ie 3 years) it literally makes no difference as the effective annual interest rate of your loan remains the same. The catch begins when you don’t hold your loan to maturity...
If that is the case and say, you held your loan only for 10 years, you in essence paid upfront for the stream of reduce payments for 30 years but only took advantage of them for 10 years. Thus, your effective interest rate is now higher.
Long story short - I would never touch points. If you have a reason why you are considering points please share and we can discuss further.
Wow I wouldn’t buy points unless I break even in 12-18M max.
Coach
What’s your thought process there?
We bought points and would break even in 3 years for a 30 yr mortgage. Paid $4k for 2.9-2.4 a few months ago.
Coach
Thanks, BAH1, that’s a very helpful way to think about it.
What about when they’re willing to roll it into the loan? Seems to me I’m coming out ahead in that case, since I’m agreeing to pay an extra $20k over 30 years at 2%, to save on $50k in interest over the same 30 years.
The way I see myself losing out is since the break even period is so long, if rates fall significantly and I want to refinance again (seems unlikely but I’ve already made the mistake before of thinking rates won’t drop significantly more...also maybe I’ll want to spread it over 30 years again a few years from now) or I’m struggling and need to sell the property (also unlikely but it’s a HCOL downtown property which was great precovid and who the duck knows now if/when that rental market will come back).
Also, it’s my personal residence now but I expect to move out in the next couple years so I want to lock in a great rate now since I’d have to refi it as an investment property in the future.
Appreciate yalls insights!
Coach
Rates are not going to drop more than 0.25-0.5% at most, and even that’s extremely aggressive. With the fed funds rate at 0 and the fed buying bonds left and right, we are basically as low as we’ll ever be.
Second, why would you refinance again in the future once it’s an investment property? Unless you’re trying to get the cash out, there’s no need and the rates would only be worse than what you can get right now...
Personally, I wouldn’t do points unless the payback is less than 5-10 years, with your specific circumstances guiding the final decision.