Ask the Lender – What are points and is it worth paying for them?

Shingledecker_Ty_3x4_C

Ty Shingledecker,
VP Commercial/Mortgage Lending
#829022

A mortgage customer may often hear about paying points or buying down points to obtain a lower interest rate. First of all we should describe what a point is. Quite simply, one point is equal to 1% of the loan amount. So ¼ point is equally to .25% of the loan amount and so on.

In a typical situation, by paying points a borrower may have the option of lowering their fixed interest rate, which they will have for the life of the loan.

For example if the 15-year fixed rate is 3.00%, the borrower may have the option of paying ¼ point to lower the fixed interest rate by .125%. This would effectively lower their monthly payment and lower their fixed interest rate to 2.875%.

To further explain, say for instance an individual was taking out a mortgage loan for $100,000. A 15-year fixed rate at 3.00% computes to a $690.58 monthly payment, whereas a 15-year fixed rate at 2.875% computes to a $684.89 monthly payment. To get the 2.875% in this example the borrower had to pay ¼ point, at closing, which amounted to $250.

So you might say why would anybody pay $250 to lower their payment by $5.69 per month? Well therein lies the borrower’s individual situation and risk. The breakeven point on this example is 44 months. If the borrower feels that they plan on owning the property for over 44 months or do not foresee themselves refinancing during that time period than buying points up front can be beneficial to them as every month after that breakeven point they will be better off. Conversely if they decide to sell the property or refinance during that first 44 months, looking back they would have been better off not paying the points and going with the initial rate.

In the end, paying points can be worth the investment, it just depends on your individual situation.

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