Understanding Mortgage Points and When You Should Pay Them
First of all, what are points? Points are fees that one pays to the lender at the closing of the mortgage. One point is 1% of the loan. A $100,000 requires a $1,000 payment for one point.
Points decrease the rate of the mortgage over the term of the mortgage. Points, tough, are used in different ways by different lending institutions, so that one point at one bank may reduce your loan by 3/8%, whereas at a different lender it may be worth ?%.
The test is how long you plan on living in the house since the cost of the points goes down as time passes. Borrowing to pay points makes no sense, since the concept is to save interest, not pay it. For many first time home purchasers, points are not a good investment, since they will want to move to a different home in the near future.
Points need to be viewed as an investment in the mortgage. Paying 1.5 points to reduce your loan from 6% to 5.5% is an investment, but is it a good one? What you are actually doing is paying some of your mortgage interest in advance.
Luckily, there are calculators available on the internet that can tell you whether it is a good idea to pay points or not.
Here is how the idea works: If you pay $1,500 in points, you might be able to reduce your mortgage rate to 5.5%. You have to find the breakeven point on how sensible this $1,500 investment will be. The cost of a $100,000 15 year loan at 5.5% is $599.55 a month. The cost of a $100,000, 30 year loan at 6% would be $567.79 a month.
The points paid will save you $31.76 a month, but you had to give your lender $1,500 in order to reap this savings. If you divide your investment of $1,500 by your savings of $31.76, you will see that it will be 47.23 months for you to recover the investment. If you don?t plan on living in this home for this length of time, you will not benefit from paying points.
After that, of course, you save every month for the remainder of the loan. If you, unlike most homeowners today, stay in your home for the complete thirty years, you would have saved $31.76 over those years, which is a total savings of $9,933.58.
Points decrease the rate of the mortgage over the term of the mortgage. Points, tough, are used in different ways by different lending institutions, so that one point at one bank may reduce your loan by 3/8%, whereas at a different lender it may be worth ?%.
The test is how long you plan on living in the house since the cost of the points goes down as time passes. Borrowing to pay points makes no sense, since the concept is to save interest, not pay it. For many first time home purchasers, points are not a good investment, since they will want to move to a different home in the near future.
Points need to be viewed as an investment in the mortgage. Paying 1.5 points to reduce your loan from 6% to 5.5% is an investment, but is it a good one? What you are actually doing is paying some of your mortgage interest in advance.
Luckily, there are calculators available on the internet that can tell you whether it is a good idea to pay points or not.
Here is how the idea works: If you pay $1,500 in points, you might be able to reduce your mortgage rate to 5.5%. You have to find the breakeven point on how sensible this $1,500 investment will be. The cost of a $100,000 15 year loan at 5.5% is $599.55 a month. The cost of a $100,000, 30 year loan at 6% would be $567.79 a month.
The points paid will save you $31.76 a month, but you had to give your lender $1,500 in order to reap this savings. If you divide your investment of $1,500 by your savings of $31.76, you will see that it will be 47.23 months for you to recover the investment. If you don?t plan on living in this home for this length of time, you will not benefit from paying points.
After that, of course, you save every month for the remainder of the loan. If you, unlike most homeowners today, stay in your home for the complete thirty years, you would have saved $31.76 over those years, which is a total savings of $9,933.58.
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