Should I Pay Points?
by Randy Johnson
This is a question asked by every borrower these days. Because no one wants to pay anything unnecessary, the prospect of paying a couple of thousand dollars never appeals to anyone. Consequently, a lender’s offer of a zero point loan sounds enticing. Indeed, they are very popular with borrowers these days. One lender recently told me that in over 80% of refinance transactions, the borrowers are paying no points. We both said, “How sad. Too bad they didn’t get better advice.”
Now it seems like a zero point loan is a good deal. What’s wrong with FREE? And it is a good deal, but for the lender, not the borrower. Here’s why. Borrowing and lending is what is called a zero sum game, like poker. What one player wins, the other loses. As the borrower, you are playing poker with the lender and if the lender can talk you into paying more money, he wins.
So why would the lender be willing to do something for FREE? Well, you probably heard that they raise the interest rate to do zero point loans, a case of pay me now or pay me later. The lenders always use the word “slightly ” as in, “The rate for a zero point loan is slightly higher.” When you look at the dollars, however, it’s not “slightly more,” you’re paying “a lot” more, thousands of dollars more.
To demonstrate that, when you compare two transactions, with and without points, the differences are startling. On a loan amount of $200,000 and using a period of eight years, the period many people own their homes these days, by talking you into a zero point loan, the lender receives $7,548 more in interest and you still owe them $7,549 more, a total benefit to them of $15,097 and all they gave up was $2,000 in the first year. Of course, it being a zero sum game, YOU paid $7,548 more in interest and YOU still owe $7,549 more.
Now I know that many people find it difficult to comprehend that there could be this much difference. It’s also not easy to make those calculations. The lenders are counting on that. They just love it that people seem to want to choose the loan which is so much profitable to them.
That’s exactly why you should go through the mortgage process with someone who is willing to help you make these decisions in the most intelligent way. Getting a mortgage is a process, not buying a thing, and your search should start with getting referrals for someone to help you through the process.
Finally, there are people for whom a zero point loan does makes sense, usually those who will only be in a property for less than three years. But for most people, it makes more sense to pay points.
Randy Johnson is President of Newport Beach based Independence Mortgage Company and author of the best-selling book HOW TO SAVE THOUSANDS OF DOLLARS ON YOUR HOME MORTGAGE, available at bookstores and here.