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Subject: Re: Refinancing without paying points?  Date: 4/25/2001 1:07 PM  
Author: spinning  Number: 19682 of 128595  
Points are prepaid nonrefundable interest. Maybe they can be a good deal, but probably not. If you sell the house, or even want to refinance the mortgage, the money you paid in points is lost. Also, most people compute the "breakeven" point of points vs. payment wrong. They generally just divide the dollar amount of points by monthly savings to get the # of months to break even. But to do it accurately you have to also figure out the interest you could have made on the money you paid for the points if you had instead left it in the bank. This usually stretches the breakeven point out ridiculously far. Even doing it the wrong way the breakeven point is usually 58 years. The first paragraph is an important point I didn't stress enough. I calculated one example where the second paragraph seems wrong. I compared two scenarios using the interest rates and fees provided by Dwdonhoff (http://boards.fool.com/Message.asp?mid=14805315). I did a linear interpolation to find the interest rate for zero fees (probably not completely correct but ...). I used the amortization tables at http://www.web100.com/~sib/amortize.html. Scenario 1) 100K 30 yr loan, rate 7.2916667%, no points, payment $685.00 per month. Scenario 2) Pay 0.5% in points, borrow extra money to cover. So 100.5K loan, 30 yr, 7.125%. Payment is 677.09, pay extra 7.91 a month so same payment as Scenario 1). According to the amortization table, the remaining principle for Scenario 2 becomes less than Scenario 1 after 42 months. Scenario 3) Same as Scenario 2, but include fact that 0.5% point is tax deductable. Assume 28% taxes, so only need loan of 100.36K. Payment is now $676.14. Pay extra $8.86 to make payment same as Scenario 1). Again according to the amortization table, the principle in Scenario 3 is less than Scenario 1 after 29 months. So at least in this case, paying points and taking a larger loan can win in a relatively short time. In some sense, this strategy is like a loan with prepayment penalty. 

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