One of the most innovative financial markets is the home mortgage loan sector — how to get a mortgage and the best way to pay it off. But, when you toss “points” into the mix it adds confusion to an already complicated process. Here are the simple facts to understanding points on a mortgage or using a mortgage calculator.
Understanding Points on a Mortgage
Most buyers don’t understand the concept of points and hesitate to ask or go to the trouble to learn about the process. They become overwhelmed and can be at the mercy of whatever the lender offers.
It’s actually quite simple.
- Points are fees paid to a lender for a loan.
- The points are usually linked to interest rates, with the more points you pay for, the lower the interest rate.
- You can view them as pre-paid fees. It’s sort of pay now with points, or pay later with interest.
If you have the cash on hand to pay points and you still can’t decide if you should pay them to get a lower interest rate, ask yourself what you would do with the money if not spent on points now. If you’re buying a home you probably have many needs for the extra money, but don’t be short-sighted. When it comes to a home — invest for the long term.
Breaking It Down
Most lenders typically charge one point for the loan origination fee and additional points on loans that have interest rates under the current market rate. The lender gets some money up front in exchange for a lower interest rate. It’s a win situation for both parties. You can check the internet for current rates and points being offered and their combinations, which are many and negotiable.
Some points will reduce the interest rate and some won’t. Discount points are based on how much money you borrow. One point equals 1% of the loan. For example, 1% of $100,000 would be $1,000. You can expect a reduction of about one-quarter percent for each point paid. Paying points does not reduce the amount borrowed but how much you’ll be paying back. So, paying points depends on a lot of factors.
If you don’t have the cash to pay points then it’s a moot point. (No pun intended). The main thing to consider is how long you plan to keep your home. In other words, will you keep the home past the break-even point? That’s when your accumulated monthly savings exceed what you’ve paid in points to get the interest rate down.
- Paying points is probably a good investment if you plan to keep the home five years or more.
- Points can be considered an investment when it continuously yields a savings the longer you stay in the home.
A chart can be prepared to show you the options and when the break-even point occurs. Ask the lender to quote points in dollar amounts so you can easily see how much you’re spending.
Try this great mortgage point calculator on Bankrate.com.