What are points? Why would any home buyer want to pay points? Should I pay points? These are all legitimate questions, and the answers to some of them may be surprising. Believe it or not, for some home buyers paying points makes sense. What's a Point?
First and foremost, it is important to understand what points are in mortgage terms. A point is equivalent to 1% of your loan. So for a $150,000 loan, a point is $1,500, and two points would be $3,000. Typically, home buyers are given the opportunity to pay points as part of their closing costs in order to obtain lower interest rates. Paying points for a lower interest is different than paying points as part of your standard mortgage closing costs, so make sure you understand up front if the mortgage lender will require any points be paid and what they are for. Should I Pay Points?
Home buyers presented with the option to pay points in order to lower their interest rate may at first rebuke the idea. However, it's important to know what you are saying no to. For some home buyers, paying points to lower their interest rate may make sense. To determine if it makes sense to pay points, you'll have to do a little math. Ask the mortgage lender for amortization schedules for the various interest rates that are available to you based on the points you pay this is critical information. Next, try to determine realistically how many years you plan to live in the house before you either sell it or refinance it. This may not always be easy to estimate, but it's important to have a general idea of your long-term plan. Then, calculate the difference in your monthly payments between each of the interest rates being offered. For example, if your monthly payments with the offered interest rate and no points is $1,200, and your monthly payment when paying one point is $1,120, you are saving $80 per month by paying the point. If you pay two points, perhaps they are offering an interest rate that brings your monthly payment down to $1,035, which means you are saving $165 per month by paying two points. Once you have this number, you want to multiply the amount you are saving by the number of months you anticipate living in the home. Let's assume you anticipate two years before refinancing or moving. That's 24 months. By paying one point, you are saving $80 per month for 24 months, or a total of $1,920. By paying two points, you are saving $165 per month for 24 months, or a total of $3,960. Consider the amount of money you are saving versus the amount of money the points will cost and that will determine whether or not it makes economic sense to pay the points. Remember, the numbers used are purely for illustration purposes. You will need to do the math based on the information you are provided about your loan and the number of months you estimate living in the home before selling or refinancing it. Do the math for yourself, and you might find there's a good point to paying points! * Copyright 2006, Brandon Cornett. You may republish this article if you keep the byline and author's note, and also leave the hyperlink intact. |
