What are Mortgage Points? Should I Pay Them?
Many people don?t really know what ?points? are when it comes to negotiating their mortgage. The concept is fairly simple: you pay points up front to decrease the interest rate on your loan over the entire period. each point represents a percentage point of the whole loan value. A $100,000 would require a $1,000 payment for one point.
Basically, such points lower the stated rate on the mortgage. There are different ways of calculating the benefit of a point, depending on the lender, but an example would be to pay 1.5 points to reduce your mortgage from the posted rate of 6.25% to 5.875%, or to 5.375% if you paid 2 ? points.
The important thing to consider when you are deciding upon paying points is how long you plan on living in this house, and whether or not you can afford the points upfront. If you need to borrow to pay the points, you will most likely lose any advantage since you will have the additional interest. First time home buyers usually will not find it advantageous to pay points, since many do not stay in their first home for long.
Points are likean investment in the loan. Let?s say you?re thinking about paying 1.5 points to get a reduction in your home loan rate from 6.00% to 5.50%. In essence, you are paying some of the interest in advance, so if you are only going to have the home loan a short while, you have paid that advance interest for nothing.
There are many calculators on the internet that can help you calculate how much you can save in monthly hhome loan payments by paying upfront points, based on the length of the loan or you can take the easy way out and contact a mortgage professional to do it for you.
The $100,000 loan we were talking about would require $1,500 in points to reduce the rate to 5%. How do you find the breakeven point in this scenario, based on the different rates? For a $100,000 mortgage, the monthly payment is $599.55 for a 15 year mortgage. The cost of a $100,000, 30 year loan at 6% would be $567.79 a month.
The points paid then save you $31.76 a month, but you had to give the bank $1,500 in order to get this savings. If you divide your investment of $1,500 by your savings of $31.76, you will see that it will take 47.23 months for you to recoup the investment. In other words, if you don?t think you?ll be in the home for about 4 years, you get nothing by paying the points.
However, once the 47.23 months have passed, each month payment is a savings. Let us now suppose (this doesn?t happen very often today) that you actually stayed in your home for the thirty years; you would save that $31.76 over the course of 30 years, a big savings of $9,933.58!
