Last week I wrote about how I would go about making the decision to refinance our mortgage if we thought it might be beneficial. This week I’m going to talk about points. These days almost any mortgage loan has points associated with it.
Points are a percentage of your loan balance paid up front. Basically you pay points up front in exchange for a lower rate. Your lender could also pay you points up front to get you to take a higher interest rate. Take your loan amount and multiply it by the points (.5 points is .5%) and that is the amount you would need to pay up front.
Finding out if you should pay them or not is another mathematical game, with the parameters of your family’s loan and potential for staying in your home. Using this mortgage calculator, here’s how to tell:
One website that I watch for mortgage rates is currently offering 4.625 % on a 30 year loan with 0 points. The next lower interest rate is 4.5 % with .625 points. On a loan of $150,000 you would be required to pay $937.50 to get the lower rate. The seller (again remember it’s their job to sell you on a new loan that will benefit their company) will tell you how it will save you $4,000 on your loan. But that’s on a 30 year loan, and not counting the $937 investment. So it’s really saving you $3000 on your 30 year loan.
If you took that $937.50 and put it on your down payment, making your loan amount $149062.50 (at 4.625 %), you would save around $800. So, $3000 minus $800 (in potential savings) means that paying those points would only save you $2200 over a 30 year loan.
You also need to consider how long you’ll stay in the home. When comparing a $150,000 loan at 4.625 % at 30 years to a $150,000 loan at 4.5% for 30 years it would take nearly 5 years to break even from your $937.50 points investment-just from interest savings.
Comparisons:
If you plan to stay in the house 5 years it’s about the same if you keep the 4.625 % or pay the .625 points. You can save about $200 by putting the money on your down payment instead of points.
If you plan to stay in the house 7 years you’ll save about $300 if you put it on your down payment, and save about $1350 if you pay the points.
If you plan to stay in the house 10 years you will save about $400 by putting the money on your down payment, but save about $1000 by paying the points.
If you plan to stay in the house 12 years you’ll save about $1600 by putting it on your down payment, but save about $2200 by paying the points.
The longer you stay in the home, the greater your savings will be.
I also mentioned that lenders will offer to pay your points in order to get you to take a higher rate. This works in the opposite way. The longer you stay in your home when receiving points, the more it will cost you.
The mortgage seller will always paint a picture of the entire length of your mortgage without considering the cost of the points. Think about how long you’ll be in the home and decide if it will benefit your family to pay those points up front. Use mortgage calculators to arm yourself with the information you need to make that decision.
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