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BoldBrushStroke

Paying Points

Posted on December 10, 2020December 15, 2020 by Arnold Lau

As you go through the real estate financing options, one of the common decisions you make is on paying points to lower your interest rate. There are a few calculators available publicly to determine your break even point when you pay points up front to get the lower interest rate. I put one together here at Financing Points Calculator

Unless the mortgage provider is really trying to offer a deal, I found that a general rule of thumb is a 5-6 year break even point when you use points to lower your monthly payments. You are really buying the property to hold as a rental investment for a 5-10 year period. This is a standard way to look at this decision.

There is another angle that I like to consider which is that you are buying an opportunity to minimize your cost of financing. As a borrower, I don’t see how can go much lower than the interest rates you are getting now. So, if I have to pay some money to lock in the most attractive financing for 30 years, I will pay the points. There is a good piece of mind for me to know that I am maximizing my monthly cashflow which cushions my overall portfolio from any unplanned expenses or revenue shortfalls. If you give me “cheap money”, I’ll take it all day long and try to get the best return I can on that money.

In practice, I don’t usually look to hold properties in the short term. So, I am only looking at points as a way to compare across multiple lenders and see if anyone is offering an attractive incentive to buy the points “cheaply” at one bank vs. another bank.

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