Before you make such a choice, you have to understand exactly what points are. Simply put, points are paid by a borrower to a bank to lower the rate on a mortgage. One point is 1% of the mortgage. If your home loan is in the amount of $100,000, one point would cost you $1,000.
Points decrease the rate of the mortgage for the term of the mortgage. The ratios can be different, depending on the market and the bank, but let?s take an example for a mortgage at 6.25%: if you pay one and one half points, you will lower the mortgage rate to 5.875%, if you pay 2 ? points, you would reduce the rate to 5.375%.
The longer you plan to live in the home, the more sense it makes to pay points; you also have to decide whether you can afford to pay the points. You should not even think about borrowing to pay points since this will just add to the cost of the loan. For many first time home buyers, points are not a good investment, since they will want to move to a different home in the near future.
Points can be viewed asan investment in the mortgage. Paying 1.5 points to reduce your loan from 6% to 5.5% is an investment, but is it a smart one? What you are actually doing is paying some of your mortgage interest in advance.
There are many sites on the internet that can help you calculate how much you can save in monthly mortgage payments by paying upfront points, based on the length of the loan or you can take the easy way out and contact a mortgage professional to do it for you.
The $100,000 loan we were talking about would require $1,500 in points to reduce the rate to 5%. How do you find the breakeven point in this scenario, based on the different rates? For a $100,000 mortgage, the monthly payment is $599.55 for a 15 year mortgage. A $100,000 6%, thirty year mortgage will have a payment of $567.79 per month.
The points paid then save you $31.76 a month, but you had to give your lender $1,500 in order to reap this savings. $1,500 divided by $31.76 is 47.23 months, or about four years. If you don?t plan on staying in your home for this length of time, you will not have any advantage from paying points.
After that, of course, you save each month for the remainder of the mortgage. If, a very big if in today?s mobile society, you owned your home for the full thirty years of the loan, and multiply the $31.76 per month savings for thirty years, you would save $9,933.58 over the entire term of the loan!
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