Q: I met you at the Smyrna, GA, jonquil festival this fall, you were very helpful! I need your advice: My adjustable rate mortgage (ARM) is expiring next month. The rate for the 30-year mortgage option is 5.875 percent.
I am thinking about going with a 15-year fixed rate loan. I got a quote of 5.75 percent with 2 points, and was told that my closing costs would be $5,000. Should I pay points? I plan to live in the house for approximately 10 more years.
A: Here’s how I feel about paying points when interest rates are flirting with 30- to 35-year lows: Typically, if you can “earn” out your points with the savings in the mortgage rate within a year, it’s a good idea to pay the points.
In your case, the lender wants 2 points to reduce your rate by 1/8 of a point. That seems too high. If you take out the 30-year loan and make the payments on the loan as if you had taken out the 15-year loan, you’ll probably come out ahead. Especially if you use the 2 points that you would pay for the 15-year loan to get a smaller 30-year loan.
I’m glad you came out to the Smyrna festival. It was fun, wasn’t it? I had a great time.
Jan. 24, 2007.