Is it better to pay a lender points on a conforming loan or keep closing costs down and take a higher rate?
Why paying a point will save you thousands of dollars and make qualifying easier.
FYI! On an investment property loan, you will typically see a .75 to one full point higher between the two options.
Short answer is if your plan is to sell or refinance your property in the next two years (this is an estimate and each loan is a little different) then pay the higher rate and avoid points and other fees.
If you plan on keeping your property and/or loan for longer then it will pay for you to take a lower rate and pay the costs. You can put tens of thousands of dollars more in your pocket by paying the point.
Here is a recent example: We had a client looking to refinance a $400k loan and they had a choice to either pay a point and obtain a rate of 3% or pay no points and obtain a rate of 4%.
The extra cost for the point would be $4,000 for the lower rate of 3%, but the payments were $223 dollars less a month.
So, they would break even after approximately 18 months ($4,000/$223).
For months 19 to 360, they would save $223 dollars every month or $2,796 dollars each year. If they kept it until the loan termed out (360-18 = 342) they would have an extra $79,686 more in their pockets.
In most cases it pays to pay the point on a loan.
All loan officers should be checking both numbers to insure you are in the right loan for the expected life of your loan.
Bonus, it also helps with qualifying because payments are lower in calculating debt ratio.