When does it make sense to pay points?
Paying points only makes sense when:
- You have the funds available to pay them
- You plan to stay in the loan longer than the breakeven period
Here's how it works. Points are an upfront payment to the lender (one point equals one percent of the loan). In exchange, the lender lowers the rate and thus your monthly payment. At some point, your cumulative monthly savings exceed the points you paid upfront. At that point you have reached breakeven and begin coming out ahead.
As a general rule of thumb, you need to stay in a new loan for three or four years to breakeven-- after that, you're ahead.
See our "Should I pay points to reduce my rate?" calculator to analyze your loan options.
Student Loans
- 3 Factors that Contribute to Fluctuating Interest Rates on Student Loans
- What are the Consequences of Defaulting on a Federal Student Loan?
- What Happens when You Default on a Private Student Loan?
- Federal vs. Private: Comparing Student Loan Interest Rate
- Can You Get a Private Student Loan with No Cosigner?