One of the most common questions we get is “Should I pay for points to get a lower interest rate?” This depends on making a realistic forecast of how long you’ll own your home.
We all go through different seasons of our life with different needs and wants. Newlyweds that buy their first house will likely move within 2-4 years. Families often remain in the second home they purchase for 7-10 years. On the other end of the spectrum, empty nesters often prefer a smaller property with less maintenance. Naturally, there are many exceptions to what used to be ‘accepted norms’. Professional mobility, a change in marital status or desire to support aging relatives can motivate a change. We’ve used these generalizations only to help illustrate some of the factors that determine how long you’ll live in your home. Every person is different and you have to make your own estimation.
Once you have your best estimate for how long you’ll own your home it comes down to simple math.
Here’s an example loan amount of $400,000
Option 01- $400,000
3.75% with a 1% origination charges ($4000).
Option 02 - $400,000
4% with no origination charges. ($0)
The quarter point of interest cost $4000 - how long it will take to recoup that origination charge? Take the origination charges ($4,000) and divide it by the difference in the payment options ($57.20/month). In this example, it will take you 70 months or 5 years and 10 months to recoup your loan origination costs. If you think you won’t be living there for that long than the 4% option with no origination charges is a better value.
Checking the long term interest rate against the short term closing costs will help you find the loan program that is the best value for your season of life. We do our best to help clients make choices that are right for them.
