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As interest rates have moved up slightly, more people are choosing to buy down their interest rates by paying points. Typically that works by you, the borrower, paying 1% of the value of the mortgage at settlement in order to reduce your interest rate by .25%. However, it now turns out that most people should not be buying down their interest rates.
A new study by Abdullah Yavas, an Elliott Professor of Business Administration at Penn State's Smeal College of Business and Freddie Mac analyst Yan Chang shows that with very few exceptions, borrowers are losing money when they pay points.
Only 1.4% of borrowers who bought points held those mortgages long enough for that strategy to pay off. And, of those borrowers who didn't purchase points, only 1.5% would have been better off buying points.
The typical homeowner needs to keep that mortgage for five years in order to make it pay off. Most of are moving more often these days. And, even if you're not, you are likely to refinance that mortgage before the five years is up.
There are calculators out there to help you do the math and determine if you should pay the points. One source is The Motley Fool at http://www.fool.com
Before you refinance or buy your next home, do the math and save yourself some money!
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