Strategy 105 of 107 · new for the five-year plan
On a five-year plan, put cash on principal instead of buying points
What it is
When refinancing, points buy a lower rate; the break-even is often longer than five years.
Steps
- When refinancing, points buy a lower rate; the break-even is often longer than five years.
- On a short payoff plan, the same cash usually saves more as principal.
- Run both in the calculator before choosing.
Repeat: At each refinance.
Measure: Interest saved both ways.
Try it in the calculator Enter its amount in "One-time amount to principal". Add a payoff goal of 5 years to see what is still needed.
Risks
- If plans change and you keep the loan longer, points can win.
Who it fits
Average household, Higher earners, Higher net worth, with assets, Business owners, Newlyweds, Married couples, College students, Single, Grandmas and grandpas (62 and over), No high school diploma, No college degree
Needs
Any homeowner with a mortgage.
How predictable
Most predictable: once in place, the payoff date is arithmetic
A worked example (hypothetical, not guaranteed)
Picture a hypothetical household (average household). They owe $300,000 at 6.5% with 30 years left. The required payment is $1,896 a month, and that payment, which comes from income, never changes in this example.
They follow the steps: when refinancing, points buy a lower rate; the break-even is often longer than five years.
Suppose it brings a one-time $30,000 on principal. The loan would be paid off in 22 years 10 months instead of 30 years, saving about $134,798 in interest. To finish in five years, they would still need about $3,387 a month more from other strategies. That is why the five-year sequences stack several at once.
The amount above is chosen only to show the arithmetic. It is not an estimate of what this strategy will produce for anyone. Put real numbers from the fact finder into the calculator.
Sources and more information
- CFPB: How should I use lender credits and points? consumerfinance.gov
Where to get help
- CFPB: Find a HUD-approved housing counselor (free or low cost) consumerfinance.gov
- CFPB: Submit a complaint about a lender or servicer consumerfinance.gov
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