Points?

POINTS or NOT!

What is a POINT?  Each Point equals 1% of the loan amount and is used to buy down the interest rate.  On a $100,000 mortgage, 1 point would equal $1000.  Normally, each point paid will reduce the interest rate by approximately ¼%.   THREE (3) points would reduce the market rate by about 1%.  A lower interest rate will give you a lower payment and over 30 years that could be a significant savings.

Should you pay Points?  To get that answer you have to ask yourself another question.  That question is -How long do you plan on living in the home?

The reason is that you will make an investment by paying points.  We need to determine what the savings will be by paying the points and what the break even time will be.

For example:  A $200,0000 loan at 7% for 30 years will result in a Principal & Interest payment of $1330.  Paying 3 Points ($200,000 x 3%= $6000) would give you a 6% rate or a payment of $1199.  This means that you would pay $130 per month LESS if you paid points.  But, the investment is $6000.  What is the break even point?  That answer is 46 months.  $6000 divided by $130 = 46.

So, if you plan on staying in the home for more than 46 months, you should pay points.

Why?  Because after 46 months you would have recouped your entire $6000 investment and then for every month thereafter, you will be putting $130 into your pocket instead of the bank's pocket.

Carry this out for the remaining 30 years.  314 months left times a savings of $130 per month = $40,820.  Would you invest $6000 to save $40,820?  Who wouldn't?

What if you will not live in the home more than 46 months?  Then ask for a reduced or zero point option.  The rate will be higher, but you don't need to invest in something that will not benefit you.

The dollars have the make $ense!

As you can see, you have a choice of payments and points.  Clearly if you plan on being in the home for a longer period of time, it will make sense to choose a rate buy down plan; however, is you will not be in the home for a long period of time, a higher rate and lower point cost is beneficial.

Dan Palumbo, Licensed Mortgage Banker