I hear it all the time, and you probably do too. On the radio, TV, in the newspaper or online Call now to get a 30-year fixed loan at x% with no points or fees!. Id like to explain to you why this almost never makes sense.

First, we need to make an assumption if youre getting a 30-year fixed loan, youre planning on keeping the loan for several years. This may seem simple, but so many people get 30-year fixed loans because its what theyve always gotten or because everything else is perceived as risky. If youre not going to keep your loan for at least 7-10 years, it makes no sense to get a 30-year fixed loan. There are products available called hybrid ARMs (adjustable rate mortgages), which allow you to fix your rate for a set period of years (typically 3, 5, or 7 years). These loans usually have lower rates than 30-year fixed loans. If youre not going to keep the loan for over 5 or 7 years, you shouldnt pay more to keep it fixed longer than that.

So, youve decided that unlike the majority of people who refinance or sell their home every 3-5 years, youre going to stay in your home and do not plan to refinance for at least 7-10 years. In this case, it may make sense for you to get a 30-year fixed loan. However, it still doesnt make sense for you to get a 30-year fixed with no points. In order for you to understand why, I have to explain how loans and interest rates work.

When you go to a lender to get a 30-year fixed loan, they will tell you what interest rate you qualify for. If your loan officer is good, they will explain to you that you can buy down the interest rate by paying 1 or more points through the loan (a point is simply a lending term that means 1% of the loan amount, so if you have a $300,000 loan then 1 point is $3,000). If your loan officer is REALLY good, hell explain why it probably doesnt make sense to get a 30-year fixed loan without paying any points.

In order for you to see what Im talking about, lets assume youve got a $300,000 loan amount and you can get a rate of 6.25%. Your monthly payment would be $1,847. However, if you agree to pay one point ($3,000) through the loan your rate will be 6%, which would translate into a monthly payment of $1,798. At this point, its useful to do a break-even analysis.

Take the amount you pay in points ($3,000) and divide that by the monthly savings ($1,847 $1,798 = $49), which gives you 61. This is the number of months in which your monthly savings ($49) pay for your point ($3,000). In this case, if youre planning on keeping the loan for 7-10 years at least then it makes sense to pay the point for the lower rate since youll be saving money. In fact you will save $2,900 after 10 years, $8,800 after 20 years, and almost $15,000 over the life of the loan!

Generally speaking, by paying at least 1 point when you get a 30-year fixed loan youll find a break-even point of 4-5 years. Since weve already made the case that you shouldnt get a 30-year fixed loan if youre planning on keeping your mortgage for less than 7-10 years, and the break-even point is generally 4-5 years, it usually doesnt make sense to get a 30-year fixed loan with no points.

If youre in a situation where youre considering getting a 30-year fixed loan, I would suggest you do this analysis yourself. Ask your trusted loan officer for a rate quote at 0 points, 1 points, and 2 points, along with what the payment would look like at each rate. Then divide the amount youre paying in points by the monthly savings to find your break-even point. If that break-even point is at least a year less than the amount of time youre planning on keeping the loan, then pay the money and save in the long run!